The banks kicked off earnings season. I'm going to share some thoughts on a bunch of the large banks that reported because they provide great insight into the state of the current credit cycle. IBM was down 25% on this news on Tuesday, its worst day ever, and it took the entire software sector down with it. Netflix reported Netflix has lost its mojo. In the past, I have said as the banks go, so goes the economy. Probably not this time. I'm starting to think that the entire future of the US economy hinges on the success or failure of AI. The potential issues in AI and in private credit will determine whether and when there will be a recession.
Hi, this is Steve Eisman and this is another episode of the weekly rap. This is for the week ending Friday, July 17th, 2026, but recorded Thursday night, July 16th, 2026. Before we get to the rap, I would like to remind everyone about our move to Substack and explain the value add. Substack is an exciting community of like-minded investors and creators, and the conversations are incredibly dynamic. The Substack ecosystem is well established with a large variety of podcasters that I interact with regularly. As a free Substack subscriber, you will receive emails sent directly to you every time we release a new premium episode and a sneak peek preview of both the video and newsletter. You'll also have access to our notes and restacks. The link to join for free is in the description. Let me quickly flag what is on our premium Substack subscription. On Wednesday, July 15th, we released an interview with Boris Peaker, the biotechnology analyst at Jones Trading. We had an incredibly extensive discussion about the entire biotech landscape and future drug innovation. I think the biggest impact AI could do is reduce the probability of failure of a clinical study, particularly a large clinical study. That would be extremely helpful, right? It was an amazing tour de force where we explored the vast world of biotech. I learned a ton. Next week on Wednesday, July 22nd, we will release an interview with recurring guest Ken Sahausski, the payments analyst at Autonomous. We discuss how AI and Agentic AI are changing the entire payments landscape. The link for premium is in the description. And now for the wrap. On this week's wrap, we will have one, the war in Iran, of course, some more news about Circle and stable coins. PayPal might be for sale. IBM reported a disastrous quarter. It actually pre-announced with terrible implications for the software sector. Elevance, United Healthcare, GE Aerospace, and Netflix also reported. Banks reported giving a broad view of the economy and one mailbag. And here we go. In war news, the situation is escalating. The US and Iran are trading strikes and there is a dispute as to whether the strait is open, but it's pretty clear now that the strait is not open. Oil prices climbed above $80 and the 10-year climbed to almost 4.66%.
Last week, there were two major pieces of news with respect to Circle. As a reminder, Circle is the stable coin company that went public in June of 2025. Circle creates stable coins, a financial product that is trying to make inroads into the traditional payment systems. Circle is the second largest creator of stable coins. Tether is the largest. On Tuesday, June 30th, there was some very negative news. Circle was down 17.5% that day because a consortium of companies including Stripe, Visa, Mastercard, Coinbase, and BlackRock unveiled their own stable coin and stable coin ecosystem. The second piece of news came out last Friday, 3 days later. Circle announced that it had received regulatory approval to become a trust bank. And on this news, the stock was up 5%. To understand its importance, you need to understand how Circle makes money. A Circle customer buys $1 worth of Circle stable coin called USDC. Circle gives the customer a stable coin, a USDC worth $1, that the customer can then use to pay for stuff. To preserve the value of the stable coin, Circle takes the dollar and buys short-term US treasuries, a security whose value does not, I repeat, does not fluctuate. Circle earns the interest on the treasuries. And that is Circle's sole source of revenue today. One caveat, Circle doesn't actually physically buy the treasuries. It puts it in a money market fund run by BlackRock. And BlackRock manages the money market fund and charges Circle 18 basis points. So Circle makes the interest on the treasuries less the 18 basis points. The bank charter means that Circle can run its own money market fund and save the 18 basis points. Now, don't get me wrong, the bank charter is certainly a positive for Circle, but between the two pieces of news, the competition from the Visa Mastercard Consortium is more important. The importance of having Visa and Mastercard as part of the consortium cannot be overstated. Creating a stable coin is just not that complicated. Breaking into the payment system is complicated, and having Visa and Mastercard as part of the consortium is crucial. Circle went public on June 5th, 2025 at $31 per share with a peak just below 270 on June 23rd, 2025. It's only about 2 weeks later. Circle is now trading around 63. The payment space remains a very difficult space. My view now about Circle is that the big companies like Visa and Mastercard are paying attention to the stable coin space. Circle is just too small to compete with these giants. It has a nice franchise, but needs to team up with bigger players. If I was running Circle, I'd be looking to sell the company. And speaking of selling the company, PayPal may have finally put its shareholders out of their misery. The stock reached a peak of 300 in the late summer of 2021. Tuesday night, the stock was $47.37. Wednesday morning, there were unconfirmed reports, still unconfirmed, that PayPal was selling to Stripe and Advent for $60.50, which would put the stock at roughly where it was at the end of last year. At 60.50, PayPal is being valued at 11 times the 2026 EPS estimate. I think other payment companies need to follow. The space has become too difficult as companies keep entering each other's space. For a deeper dive on the payment space, take a look at our episode on January 26, 2026 with Ken Sahausski, the payments analyst at Autonomous Research.
Now, before we get to the banks, we got a whole bunch of companies to cover. I want to first focus on IBM, which pre-announced a terrible quarter on Tuesday. Now, until now, investors have been worried about the long-term and negative implications of AI on the software sector, the so-called SaaS apocalypse. I love saying that. IBM's results show that there are now short-term implications as well. IBM pre-announced EPS of 2.93 versus 2.80 last year, but a miss versus expectations of $3.01. Worse, revenue of 17.2 billion missed expectations of 17.9 billion. So quite a miss. It is, I must emphasize, unusual for a company of IBM's size to miss both EPS and revenue guidance only one quarter out. Things must have changed rapidly this quarter. And what were those changes? Two of IBM's major businesses are its software and infrastructure businesses. The infrastructure business provides hardware, software, and services to critical enterprise workloads. So, it too is partially a software business. So, why the miss? The problem is the dramatic increase in prices for chips and other tech equipment because of AI demand. IBM management stated, and I quote, "In the last few weeks of June, we saw clients shift their quarterly capex spend towards servers, storage, and memory purchases to secure supply-constrained infrastructure ahead of expected price increases." So now there is a long-term SaaS apocalypse and a short-term SaaS apocalypse. I like saying that sentence. IBM was down 25% on this news on Tuesday, its worst day ever, and it took the entire software sector down with it. Another side to the same coin was the results at Ericsson, which develops network equipment and software. The stock was down double digits on Tuesday on its earnings report. Ericsson reported a 7% decline in earnings and revenue fell 6%. And it provided weak guidance because of component cost inflation. So Ericsson is suffering from higher semiconductor and tech equipment costs. And still another side to the same coin were the positive results at ASML, which produces semiconductor equipment, specifically machines for the production of chips through lithography. ASML is clearly a beneficiary of the AI boom. It reported a strong quarter. It beat on EPS and revenue and it raised guidance and the stock was up.
In health insurance, Elevance and UnitedHealth reported. The group has done very well this year as companies have been able to raise prices enough to finally overcome higher health care costs. However, still a tough environment. Elevance reported on Wednesday EPS of 7.45, down 16% versus last year, but higher than the 6.18 estimate. The stock was down on the print for two reasons. The company raised guidance but by less than the second quarter beat and perhaps more importantly total membership dropped by 1% as the increase in prices negatively impacted membership. On the other hand, the very next day, UnitedHealth reported and the market really liked the results. The company beat expectations and raised guidance. It's all in the pricing. Revenue is flat, but UNH and the industry are in the process of raising prices and that is improving margins. Moving on, GE Aerospace is riding a positive cycle in aerospace and it also reported. While the results were great, the stock was down on the print. Why? First, the results. The company reported earnings per share of 2.02 versus 1.66 last year and versus the estimate of 1.86. Revenue was 12.63 billion, up a nice 24% and almost 1 billion higher than the estimate. So far so good. The company raised guidance to 7.65 to 7.85 versus prior guidance of 7.10 to 7.40 and versus expectations of 7.56. That sounds good, too. But the stock was down around 4% because investors clearly wanted the company to raise guidance by more. On such stuff, stocks move. And finally, before we get to the banks, Netflix reported Thursday night. Netflix reported EPS and revenue in line with expectations. EPS was up 11% which is nice but not like the go-go days. Moreover, in the press release, the company said it would cut back on the frequency of its "What We Watched" reports which provide a picture of engagement. In the future, Netflix said that it will publish this report only annually in the first quarter of each year. The market did not like the fact that the results only met expectations and it also did not like the virtual elimination of the "What We Watched" report and the stock was down 8% after hours and is down 20% this year. Netflix has lost its mojo.
And now for the banks. The banks kicked off earnings season. I'm going to share some thoughts on a bunch of the large banks that reported and then show you how to think about valuation given the results. Before I do that, I want to focus on how the large bank results are of particular importance because they provide great insight into the state of the current credit cycle. The four large banks, JPMorgan, Citi, Wells, and Bank of America have large and broad-based lending businesses. On the consumer side, they provide credit cards, auto loans, and sell for other types of consumer loans. On the commercial side, they make commercial real estate and corporate loans, and other types of commercial loans as well. They don't do everything, but they are big enough and broad enough to provide a real window into the health of the US economy. By analyzing the credit results of these four banks, we can get a closer understanding of whether the problems in the private credit sector are broadening into a large credit cycle for the overall economy. Now, there is growing fear that credit losses will start to mount for the first time since the Great Financial Crisis. And we've had 17 years of amazingly benign credit quality, and investors are wondering if the good times are going to be over. Yes, private credit is exposed to software and software is getting hit by AI, but are there signs of broad credit problems emerging in the actual data? When the major banks report, they provide reams of data. JPMorgan's quarterly earnings release supplement is 29 pages long and is filled with information on every page. That is typical of how the banks report. To see trends in credit quality, the best place to look is to examine consumer and commercial non-accrualing loans. A non-accrualing loan is a loan that is seriously delinquent, usually 90 plus days. A bank no longer reports interest income from these loans and reserves for future losses. I am putting on the screen consumer and commercial non-accrualing loan data for JPMorgan, Wells Fargo, Citi, Bank of America for 2Q25, 1Q26, and 2Q26. These four banks combined provide a large window into credit quality trends. If there was a serious trend of deteriorating credit, we would see increases in non-accrualing consumer or commercial loans or both on a year-over-year basis and a quarterly sequential basis. We certainly saw large increases in consumer non-accrual loans leading up to the GFC. We are not seeing that now at all. I want to emphasize that at all. The credit data is benign in both consumer and commercial. For those of you who are just audio listeners, I'll just focus on JPMorgan and Bank of America. For JPMorgan, total non-accrualing loans were 9.4 billion in 2Q26. They were down 5% year-over-year and down 2% versus 1Q26. The numbers at Bank of America were also very benign. 2Q26 total non-accruals were 5.8 billion, down 4% year-over-year and flat with 1Q26. Conclusion: the credit trends reported by the large banks are very benign. Maybe a credit cycle will emerge but we are not seeing it in the banks. That is an important data point. The banks have the broadest credit exposures. So their results are a concurrent indicator. And this brings me to my conclusion about the state of the US economy. Since the GFC, commentators have tried to predict the next crisis. This is, they say, that it isn't. Perhaps the most important story of the past 17 years is how powerful and resilient the US economy has become. Yes, there are problems in private credit with respect to overexposure to software. And perhaps these software issues are harbingers of an approaching credit cycle. Yet, the banks have shown once again that credit quality in the US is okay. Until that changes, the US economy will be fine. Fine, yes, but we do have a K-shaped economy. So, it's not fine for everyone. I just don't see a recession though on the horizon as long as bank credit quality is benign. The problems that may emerge in the US economy rest not with the banks. They rest elsewhere. Whether AI will succeed or fail, whether private credit will show more problems, that is where problems could occur. In my view, the banks this time are not leading indicators. In the past, I have said as the banks go, so goes the economy. Probably not this time. The banks are extremely well capitalized and their credit quality is benign. The potential issues in AI and in private credit will determine whether and when there will be a recession. It would be much easier to predict the future if the banks were the leading indicator because the data the banks produce are voluminous and transparent while private credit is much more opaque making future economic weakness much trickier to see. Frankly, I'm starting to think that the entire future of the US economy hinges on the success or failure of AI. That's why I talk about it so much. As for the financial results of the banks this quarter, they once again posted powerful results largely because of extremely strong investment banking and trading. The banks are partial beneficiaries of the AI boom as companies with AI financing needs are going to Wall Street for help. These results produce record levels of returns. Here's a brief synopsis. JPMorgan EPS was 6.14 versus 4.96, 24% growth. Revenue was also a big beat and was up 15% versus last year. The return on tangible common equity was a very strong 23%. Bank of America also reported a great quarter of 1.21 versus 0.89, 36% growth and versus the consensus of 1.12. Revenue was up 15% on better trading and investment banking and it had nice operating leverage. Return on tangible common equity was a strong 16.5%. Wells Fargo has a history of occasionally disappointing like last quarter but not this time. Wells results beat. EPS was 2.00 versus 1.60, 25% growth. Again, the strong results were largely from trading and investment banking. Wells's return on tangible common equity has been stuck at 14 to 15% for many quarters. This quarter elevated the ROTCE to 17.7%. Impressive. Citi also had a good quarter for similar reasons. The company reported EPS of 3.15 versus 2.12, 48% growth. The company posted strong results in services, trading, and investment banking. And the return on tangible common equity was 13%, the same as the first quarter of this year and versus 8% in the second quarter of last year. Right now we are in a golden age for investment banking. Trading volumes are high. AI is creating massive financing needs. The IPO market isn't bad and M&A is very strong. That's why the most powerful results this quarter came from Goldman Sachs and Morgan Stanley. Goldman Sachs reported a great quarter. It reported EPS of 20.98 versus 10.91, 92% growth. Wow. Again, the results were supported by powerful trading and investment banking. And the return on tangible common equity was a powerful 25.5%. Like Goldman, Morgan Stanley produced powerful numbers, too. Revenue was at record levels and up 27% versus last year. EPS was up 62% and the return on tangible common equity was a best-in-class 26.6%. As to how to value the banks, the easiest and most consistent way is to look at the return on tangible common equity. The higher that percentage, the higher the price to tangible common equity. That's why Goldman, JPMorgan, and Morgan Stanley are valued at 3 to 4 times tangible book. Their return on tangible common equities exceed 20%. At the same time, Wells Fargo, Bank of America, and Citi are at 1.3 to 2.1 times tangible book as their ROTCEs are 13 to 18%.
Our one mailbag is a follow-up from last week. Last week I answered a premium subscriber's question as to what I read. I provided a list of books, mostly history books, but I also mentioned that I read graphic novels and comic books partially because I find them somewhat oddly prescient and they also tell great stories. I did not provide any titles, so of course several viewers asked for titles of graphic novels. This could be an endless discussion. My digital comic book collection exceeds 11,000 comics. If I listed every comic I like, we'd be here all day and all night. So, I'll just name my top 21. Number one, Sandman by Neil Gaiman. Maybe the greatest comic book ever written. The Netflix series was pretty good, too. It's about the god of dreams. Two, Lucifer by Mike Carey. A Sandman spin-off. And yes, that Lucifer. Lucifer quits being the devil and ends up living in Los Angeles. This comic is one of the deepest theological stories I have ever encountered. Number three, Fables by Bill Willingham. Snow White, Sleeping Beauty, and Prince Charming have been living in Greenwich Village for hundreds of years. A great story. Number four, Hellblazer. Varied authors. Some authors were better than others, but the character Constantine is complex and amazing. Number five, Swamp Thing. One of the most underrated comics ever, but one of my favorites. Alan Moore changed the entire story. Number six, The Dark Knight Returns by Frank Miller, published in 1986. This story changed comics forever. It made comics darker and much more serious. Number seven, Batman Year One by Frank Miller. And number eight, Daredevil Born Again, also by Frank Miller. Number nine, Watchmen by Alan Moore, an iconic comic. Number 10, Lazarus by Greg Rucka. This comic is ongoing and has been going on for more than a decade, but it's the best dystopian story in comics. The entire world is ruled by a few rich families. 11. Nemesis by Mark Millar. Just a great story. 12. Wolverine, Old Man Logan, an alternative history comic. 13. Welcome to Tranquility by Gail Simone. Superheroes living in suburbia. This is an amusing story. Number 14. Flashpoint by Geoff Johns. What happens when the Flash changes history? The results are not good. 15. The Boys by Garth Ennis. The original story of a world where superheroes are bad. Up is down and down is up. 16. Starman by James Robinson. Robinson takes a B-level superhero and elevates him. 17. The Golden Age by James Robinson. What if Hitler had survived? 18. Avengers Disassembled by Brian Michael Bendis. What happens when a superhero goes completely insane? 19. House of M, also by Brian Michael Bendis, the sequel to Avengers: Disassembled. 20. Powers by Brian Michael Bendis. What happens when a superhero loses his powers and becomes a cop? And finally, 21. Alias by Brian Michael Bendis. This comic introduces the character Jessica Jones to the Marvel universe. It's a story of an emotionally damaged superhero who becomes a private detective. And in honor of the new movie, The Odyssey, coming out this Friday, I have a book recommendation. There are many novels that explore aspects of the Iliad and the Odyssey, and I've read several. For me, the best one is a trilogy written by David Gemmell. The first book is called Lord of the Silver Bow. It's a complete reimagining of the Trojan War story, and it's fantastic. This last Monday, July 13th, we released on our free service an interview with Torsten Slok, chief economist of Apollo, and we discussed a broad range of topics, but focused a lot on the impact of AI on the overall US economy. So, check it out. And this coming Monday, July 20th, we will release an interview with Ben Kellow, the sustainable energy and mobility analyst at Baird. We discuss how the buildout of AI data centers has upended the entire sustainable energy landscape, creating a hypergrowth story. The best way to support The Real Eisman Playbook is to subscribe to Substack and to YouTube. Subscriptions are free and we appreciate your support. And that's the wrap.
This podcast is for informational purposes only and does not constitute investment advice. The hosts and guests may hold positions in stocks discussed. Opinions expressed are their own and not recommendations. Please do your own due diligence and consult a licensed financial adviser before making any investment decisions.
