PMI data shows the economy continuing to expand in July led by the Services sector. Banks stocks seem to have found near-term support after the historic July rally. I look at changes in earnings estimates and the latest CRE delinquency data. This week brings July inflation updates.

Final July Services PMI data (August 5) found the U.S. economy expanding robustly in July led by Health Care and Financial Services. The report commented, “Another strong expansion of business activity in the service sector, which over the past two months has enjoyed its best growth spell for over two years, contrasts with the deteriorating picture seen in the manufacturing sector, where output came close to stalling in July.â€

The report concluded that, “the July PMI surveys are indicative of the economy continuing to grow at the start of the third quarter at a rate comparable to GDP rising at a solid annualized 2.2% pace.†I note that there remains a statistically significant divergence between the S&P Global Services PMI findings and the findings of the ISM Services surveys with the correlation coefficient between them at -0.07 for the period from January 2022 through present.

Bank indices such as the Nasdaq BANK index declined for a second consecutive week but seem to have found support near their prior resistance levels when viewed technically. I continue to focus on anticipated changes to key earnings drivers in the industry to assess expected earnings growth to support continued upside in stock prices.

Since the start of July, consensus sell-side median Earnings per Share estimates for the mid-cap bank group are basically unchanged. The 2024 EPS estimates were revised higher basically to reflect the beat to estimates in the second quarter. Expected 2025 EPS growth of 8.25% is also static over the last month. While any EPS growth would be a welcome change from the EPS contraction experienced in 2023 and 2024, the current expected growth rate is not sufficient to push indices such as BANK above their July highs, in my opinion. Headwinds such as increasing credit costs are real and will likely be an earnings drag for some time still. The July CRE delinquency data from Trepp show overall delinquency rates higher in July. We also see delinquency growth in other loan segments such as consumer credit card portfolios. Despite the latest PMI data, I continue to note signals for elevated recession risks. Economic contraction would put more loan segments at risk for higher delinquency rates.