JPMorgan (JPM) shares edged lower in early Thursday trading, but remain one of the market's top-performing bank stocks this year, as investors look to the lender's first quarter profit report to help define the tenor of the broader earnings season.
The biggest U.S. banks, including JPMorgan, could see solid benefits from the market's overhauled forecast for Federal Reserve interest rate cuts, as the Fed funds rate is likely to stay elevated until at least the autumn, as well as a rebound in global dealmaking.
Net interest income, a key measure of bank profitability, tends to improve in a higher rate environment as banks take in more from loans and other activities than they pay out in deposits.
JP Morgan in fact saw its 2023 net interest income rise 33% from 2022 to an overall tally of $89.3 billion as the Fed extended its rate-hiking cycle and "higher for longer" message.
The bank forecasted 2024 net interest income to be around $90 billion when it reported fourth-quarter earnings in January, a tally that will offset its rising overall expenses.
Earlier indications of at least four and as many as six Fed rate cuts this year compelled JPMorgan to lower its net interest income projections for the current year, but the recent run of faster-than-expected inflation reports has markets betting on the chances of no rate cuts until early 2025.
Net interest income is key to JP Morgan report
"We expect the global U.S. banks to refine their 2024 guidance for total [net interest income] to a smaller reduction compared to NII in 2023," CFRA analyst Kenneth Leon wrote before this week's March inflation report.
"Most U.S. economists are currently anticipating no more than three Fed rate cuts, and if inflation remains elevated, we may not see any rate cuts in 2024," he added. "Along with a healthy U.S. economy with GDP growth, this would drive potentially higher [year-over-year] gains in total NII for these banks."
Related: JP Morgan CEO Jamie Dimon delivers stark warning on inflation, economy
JPMorgan CEO Jamie Dimon cautioned this week in his annual letter to shareholders that while the U.S. economy "continues to be resilient, with consumers still spending," a good portion of the current growth rate is "fueled by large amounts of government deficit spending and past stimulus."
He added that longer-term costs associated with the green-economy transition, supply-chain restructuring, and rising military spending "may lead to stickier inflation and higher rates than markets expect."
JPMorgan is the fifth largest bank in the world, with a market value of around $572 billion and around $3.2 trillion in assets under its umbrella.
M&A rebound may boost noninterest revenue
Analysts see the bank posting first-quarter net interest income of $20.2 billion, a 13% slide from a year earlier, with overall revenue rising 6.25% to $41.84 billion.
When JPMorgan reports early in the morning of April 12, it's likely to deliver earnings of $4.15 a share, a bottom line around 4% south of the year-earlier tally, analysts estimate.
The bank's near-term financial projections, however, will be crucial for its stock performance and the broader banking sector.
That sector is expected to contribute around 17.6% of the S&P 500's expected second quarter profits of $494.1 billion, a level second only to the 20.2% expected from the technology sector.
"We find ourselves in an environment where stocks appear fully valued, market interest rates are climbing and the consensus expectation for Fed rate cuts is dwindling," said John Lynch, chief investment officer for Comerica Wealth Management.
"It is therefore imperative ... that corporate profits continue to expand to justify current levels of equity valuation and investor sentiment," he added.
Related: Hot inflation report batters stocks; here's what happens next
JPMorgan and rivals Citigroup (C) and Goldman Sachs (GS) are also expected to benefit from a rebound in global merger activity, as overall first-quarter deal volumes rose 30% from a year earlier to $755.1 billion.
Analyst Leon of CFRA also notes that while first-quarter equity capital markets underwriting, which includes IPOs, rose only 1% from a year earlier, it still marks the best pace of gains since 2021.
"Global U.S. banks may talk about a few 'green shoots' in the investment-banking pipeline," Leon said. But he cautioned that the same big banks will likely be "more conservative on new-loan origination and credit risk."
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Another possible topic: Succession at JP Morgan
The bank may also discuss its newly revealed succession plans, which were included in an investor update earlier this week as Dimon, 68, enters his 19th year at the helm of the biggest U.S. lender.
Current chief operating officer Daniel Pinto, 56, was tabbed as "a key executive who is immediately ready to fulfill the responsibilities of the CEO" should the need arise. Also in the frame: Troy Rohrbaugh and Jennifer Piepszak, co-CEOs of JP Morgan's commercial and investment bank,
JPMorgan shares were last marked 0.47% lower in mid-day trading and changing hands at $194.55 each, a move that still leaves the stock with a year-to-date gain of around 13%.
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