This morning, JPMorgan Chase (JPM) and Wells Fargo (WFC) reported Q2 2020 earnings. Their results could not have been more different and the nature of the difference points to three important takeaways for investors.
Wells Fargo didn’t just lose money, they lost a lot of money. Expectations coming in were for a loss of $0.20 per share, but the bank missed even that pessimistic number by a country mile, reporting a loss of $2.4 billion, or $0.66 per share. On the other hand, JPMorgan Chase and Citigroup (C) didn’t just turn a profit, they both made a lot more than expected. JPM showed EPS of $1.38 vs. a consensus estimate of $1.05, while Citi nearly doubled expectations, making $0.50 per share rather than the $0.28 analysts had predicted.
The difference itself leads us to takeaway number 1:
1: It’s A Stock Picker’s Market
Stock sectors are important things for investors to understand and have become even more so with the advent of sector ETFs. They enable you to position for cyclicality and differing economic conditions without the need to research and trade in individual stocks. That is useful, but it can result in a kind of laziness, where there is an assumption that all tech companies, say, or manufacturing companies or whatever are basically the same thing. One of the sectors where that assumption is most frequently made is in financials, but this morning’s earnings showed how wrong that is in the current environment.
It is true in other sectors too. Companies with a lot of international exposure are doing better than purely domestic plays as it becomes clear that the U.S. response to the pandemic has been a failure compared to in other parts of the world, for example, while businesses focused on a “stay at home” approach are massively outperforming those centered on people going out. Right now, the differences between companies are more important than the similarities.
WFC’s results were nothing like those of JPM and C because the bank is nothing like its competitors, and the differences take us to takeaway number two.
2: There are 2 U.S. Economies
A lot has been said over the last few months about the divide between Wall Street and Main Street in America, and this morning’s bank earnings made it clearer than ever that such a divide exists.
While you may see Chase and Citi branches in many places, they, unlike Well Fargo, are not primarily dependent on retail banking for their profits. Both have massive trading divisions, and that is where the money came from last quarter. JPM made $9.7 billion from those operations last quarter, while Citi wasn’t far behind with $5.6 billion in trading profits.
In both cases, those results hid poor performance in retail banking and lending, as ordinary people and Main Street businesses struggled under the coronavirus related restrictions and huge job losses. Wells Fargo, without the benefit of big trading profits, was more reliant on revenue from individuals and small businesses. As anyone who fits into one of those categories can tell you, no matter how much money is being made on Wall Street and how optimistic the market may be, things in the real world are still pretty tough. WFC’s results reflected that reality.
3: Year-on-Year Earnings Growth Doesn’t Matter
This is a point that I made in yesterday's Market Musings piece and these early bank earnings proved my point.
Both JPM and C responded positively in early trading following their releases despite one inconvenient fact. JPMorgan Chase’s results represent a 51% drop in income versus the same quarter last year, while Citi did even worse, with their net earnings collapsing 73% year-on-year.
One could say that in a logical sense, even a moral one given point 2 above, that the market reaction to those numbers is worrying. The sight of the market rewarding management and shareholders for such dismal performance based on their propensity for massive risk-taking is, from those perspectives, puzzling to say the least.
Or you can take the practical view that I took yesterday. It may not be what you think is right or should be, but for now it is what is, and you can trade and invest accordingly.
All of the above taken together leads to one, overarching conclusion. Investors should be careful not to read too much into results beyond what they say about one company in one moment. There is huge divergence in performance within sectors, a market that is operating separately from the economy, and stock prices that are higher than a year ago despite lower earnings, massive unemployment and a great deal of uncertainty. In those conditions, you just have to take each release on its own. At some point, I suppose, consistency and logic will return, but these bank earnings and the market reaction to them show that we aren’t there yet.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
Read Martin's Bio