Maybe JPMorgan Chase (JPM) CEO Jamie Dimon felt his bank’s earnings report was so good that he had to pour a little cold water on investors. “This may be the most dangerous time the world has seen in decades,” Dimon said in a statement Friday. He also issued a caution about the records set in the third quarter. “These results benefit from our over-earning on both net interest income and below normal credit costs, both of which will normalize over time.” But the caution aside, it’s hard for me to find anything not to like in the big bank’s report.
Today’s video is Earnings: It’s All About Surprise. Good news is good, but it doesn’t necessarily move markets. On Friday, July 14, JPMorgan Chase came out with a stellar earnings report–but other stocks in the sector moved down on a belief that these banks wouldn’t match JPMorgans good news. However, SURPRISE! On July 18, Bank of America came out with a very good earnings report, and the stock popped by 4.2%. Bank of America surprised the market with a big bump from its Wall Street trading operations. On the surprise, Bank of America actually moved the entire banking index up 2.29%. On the negative side, regional bank PNC Bank surprised negatively with a cut to its full year guidance from 6-8% to 5-6%, and the stock, of course, fell. (Early in the day although it recovered by the close.) Keep all this in mind as we head into earnings season for technology companies, where expectations are often very high. Apple is one of the first to report and will set the tone for the second quarter which is typically a weaker quarter in the technology sector.T
This week’s Trend of the Week is Banks: It Can Still Get Worse. First Republic (FRC) is an example of a really hammered regional bank. They have about $4.2 billion in unrealized losses and the bank doesn’t look viable. On March 6, FRC stock was at $122, and by March 20, it had dropped to $12 and hasn’t really gone up since. Most recently, on April 10, the bank announced it will no longer pay the dividend for preferred shares–a surprising move as preferred shares are generally safe from such dividend cuts. This is just one example of how it’s still possible for things to get worse in the sector. As bank earnings season gets underway, you can expect a lot more bad news, with banks reporting high amounts of unrealized losses. In some cases, those unrealized losses could truly imperil the banks. I’m not sure where the worst problems will be and which banks are most affected, but we’ll see them start to pop up as earnings reports come out and banking Whac-A-Mole begins.
I expect the earnings season story for the coming week to continue to be dominated by banks. But whereas last week, Friday specifically, was all about big banks, this coming week will be dominated by earnings reports from regional and smaller banks. That’s the very kind of banks that are the focus of worry about the collapse of Silicon Valley Bank and Signature Bank. We will, however, get a sprinkle of earnings reports from non-bank names just to add some spice to the week.
It is good, maybe great news this morning from three of the country’s biggest banks. JPMorgan Chase posted a surprise 2% increase in deposits and first-quarter net income surged 49%. Wells Fargo (WFC) saw net interest income rocket by 45%. Citigroup (C) reported a 23% gain in net interest income and a 4% increase in fixed-income trading. As of 2:30 p.m. New York time JPMorgan Chase shares were up 7.33%. Wells Fargo had tacked on a small 0.05% gain. And Citigroup was up 4.88%. And all the major stock indexes were significantly in the red.
I will add this post to the end of my post of the entire Special Report today. I’m also posting it here, however, as a stand-alone so you will get notice in your email box that Move #4 has gone up. Here’s what I posted for Move #4.
Officials from the White House, the Treasury Department, and the Federal Reserve, are huddling over risks to the banking systems from the $20 trillion market for commercial real estate. Analysts told the Washington Post that this market could be heading for a crash over the next two years thanks to higher interest rates and continued softness in demand after Covid shutdowns. One reason that this market is getting extra attention is that regional banks, already under pressure from problems at Signature and First Republic banks, play a big role in this market for loans to commercial real estate.
Bank shares around the world have lost $460 billion so far in March (as of the close on March 17.) That’s a lot of money. Even these days when a coffee can run you $5.60. That’s the worst loss for the sector since the March 2020 Covid plunge.
Ok, so Dan Ives is talking his book (or sector at least) but he still raises an interesting point. (Dan Ives is a Managing Director and Senior Equity Research Analyst covering the Technology sector at Wedbush Securities since 2018.) With bank stocks in particular and the financial sector in general in turmoil, will investors looking for steady earnings turn to tech stocks? (Well maybe not all tech stocks but how about Apple (AAPL) and Microsoft (MSFT)?
Sometimes a single earnings report is just that–a report from a single company that reflects what’s going on in that company’s business and that tells us relatively little about the economy as a whole. And then there are earnings reports that give us a snapshot of the larger economy from the point of view of a single company. In that case, savvy investors should be looking to extrapolate from that snapshot. Today, October 21, American Express (AXP) delivered this second kind of earnings report.
I don’t like the economic and financial environment looming ahead for banks. I see bad loans rising with a need to reserve more against bad loans. Slowing economies aren’t good for loan demand or credit card delinquencies either. So I’m taking advantage of this moment to sell Truist Financial out of this portfolio in spite of the stock’s hefty dividend. I’ve got a loss on this position of 4.07% since I added it to this portfolio on June 13, 2022. The stock is down 22.19% for 2022 to date as of the close on October 12.
Given the big role that stock buybacks play in sustaining rallies and driving stock prices higher, news in earnings reports this past week that both Citigroup (C) and JPMorgan Chase (JPM) are suspending their stock buyback programs is a big deal. Not just for these big banks or for the banking sector, but also for stocks as a whole. After a huge drop in buybacks in 2020 thanks to the Pandemic recession, buybacks for the companies in the Standard & Poor’s 500 roared back in 2021 to hit a new record of more than $850 billion. That easily broke the old record of $806 billion set in 2018. Buybacks support stock prices in two ways.