Traders who postpone the potential interest rate cuts from the Federal Reserve (the Fed) could be in for a reckoning. According to the FedWatch tool at CME Group Inc., the Fed started the year proposing cuts as soon as March 2024; traders now see these cuts pushed back as far as September 2024.

After reporting its first quarter 2024 results, Citigroup Inc. (NYSE: C) kicked off the financial stocks earnings season on a better-than-expected note. That stock is up about two points in the pre-market hours of Friday morning. Despite contracting financials, underlying trends at the bank suggest potentially brighter times ahead for the stock market.

On a corporate and consumer level, retail investors can gain enough insight from Citi’s figures to adjust their portfolios accordingly. Before the party starts, here’s an overview of what has driven the stock market to its recent all-time highs and why these levels may not be at as much risk as some think.

Squeezing The Last Leg

The way Citi made its money during the quarter can give investors insight into what is happening underneath the hood of financial markets. Investment banking revenues were reported to be 35% higher over the past 12 months.

When investment banking activity gets hotter, the Financial Select Sector SPDR Fund (NYSEARCA: XLF) tends to do well, which is why it has kept in lockstep with the broader S&P 500 in making new all-time highs.

Mergers and acquisitions (M&A) typically bring the bulk of fees for investment banks, and these departments only churn when their clients can make deals happen. Low interest rates, or the expectation of lower rates, enable cheaper financing for these deals.

Despite traders betting on postponed Fed rate cuts, Wall Street's pulse is still on a surprise this year. Citi's net interest income has declined by 2% every quarter, signaling the start of a credit market adjustment to the coming rate cuts this year.

Inside the banking segment, debt capital markets (DCM) fees were up 62% during the year. In contrast, equity capital markets (ECM) fees pushed only 57%. Because rates remained elevated during 2023, it makes sense to see DCM banking activity this high; however, that may soon change.

Citi said in its investor presentation, “Seeing good momentum in announced Technology and Healthcare M&A.” This is corporate lingo for “get ready,” as these two sectors are set to push markets higher in the coming months.

With the Health Care Select Sector SPDR Fund (NYSEARCA: XLV) at all-time highs, it makes sense that M&A activity could start in healthcare stocks. Lower interest rates will likely create jobs for the sector and spur consumer discretionary activity and corporate IT spending to help technology stocks.

Consumers Need Help

Despite elevated interest rates, consumer loans rose by 1% quarterly and 5% over the past year. The problem lies in the number of clients who now have to rely on credit cards to fight off stubbornly high inflation rates affecting the U.S. economy.

As a percentage of total FICO scores, those below 660 now make up 15% of total loans, up from 14% a year prior. Those above 660 saw a similar 1% decline, meaning the credit profile of these credit cards is deteriorating.

Non-performing loans, characterized as those with 90 days or more of delinquency (nonpayments), are also on the rise. Valued at only $1 billion in the first quarter of 2023, they are now $1.8 billion and making up 4.5% of average loans, where they only represented 2.8% a year ago.

Citi may be taking the long view on this one, knowing that U.S. consumer sentiment is now at a 3-year high; the bank could be betting on lower rates ahead by taking some short-term risk in lower-profile consumer loans.

Stocks Are Still in Fashion

Trading revenues helped Citi beat analyst expectations despite a low volatility index (VIX). Revenue compositions between stocks and fixed-income (bonds) also have much to say about this trend.

Equity markets revenue was up 5% over the year, while fixed-income markets revenue declined by 10%. Retail investors can jump to all conclusions here, but one root truth remains: Citi likes stocks over bonds, and so do its traders.

Citi outperformed peers like Bank of America Inc. (NYSE: BAC) over the past six months; an 11% gap over its competitor can be a sign of more to come from the sector and an even better signal for the stock market’s next run higher.