It always interests me when a stock moves in the opposite direction to that suggested by their earnings, such as happened noticeably this morning with JP Morgan Chase (JPM). The banking giant posted earnings that were up 6% on revenue that increased by 8%, beating analysts’ expectations on both fronts.
And yet, based on trading in the premarket, the stock looks set to open around 3% below yesterday’s close as I write this. There seem to be two reasons for that discrepancy. They are related and taken together would seem to suggest that the drop in JPM is a rare chance to buy an outperforming stock at a discount.
First, traders appear to be disappointed by the forecast for interest income that accompanied the report. The actual income from lending activities beat expectations for Q1, but the forecast was lower than Wall Street would probably have liked. Higher interest rates equate to higher interest income for banks, obviously, and with the market now assuming one or two rate cuts rather than the six or seven that was being assumed a few months ago, analysts were expecting an upbeat guidance for interest income from all of the major banks.
JP Morgan, though, disappointed in their forward-looking view.
The second reason for the selling this morning is also about guidance, but not something specific. Rather, it is about the tone adopted by the bank’s well-known CEO, Jamie Dimon, in his comments that accompanied the release. Dimon pointed out some headwinds that he saw, including an unstable and overly optimistic pricing in the equity market.
Those comments seem particularly relevant this morning. Reports have surfaced that Israel is preparing to be attacked by Iran, indicating that Israel at least is taking Iran’s threats seriously and raising the possibility of Israel’s campaign against Hamas escalating into a full-blown regional war. That is, of course, a concern with the potential for far-reaching consequences beyond the economy, but my concern here is with markets, and on that level, there are several negative impacts.
One of those impacts has been to spur buying in the oil markets, which had been taking a bit of a breather in its upward climb. Oil is a key factor in inflation, so that gives another reason for traders, already spooked by a CPI report this week that showed the second consecutive higher than expected print and the third consecutive increase in headline inflation, to worry.
That all seems logical enough, but when thinking about any market-related news, or any news at all, one should always consider the source. In this case, that source is Jamie Dimon. He is an extremely smart person, whose opinions are definitely worth listening to. He did, after all, lead the company in acquiring First Republic during the regional banking crisis which, given that they were a major contributor to these good earnings, once again looks like one of the greatest deals in banking history. He is also, however, renowned for his caution.
That is an admirable trait in a banker, and it may be why JPM has outperformed other major banks for a while, as you can see from the comparative chart below.
JPM (Main body) vs C (Green line) and BAC (Blue line), 2-Year Chart
That consistent outperformance would sometimes make me reluctant to get involved in JPM at this point on the basis that any value in the stock likely disappeared a long time ago. However, a reaction to negativity from Dimon looks like too good an opportunity to pass up.
His consistency could be seen as admirable, but Dimon has been cautious, often downright negative about things, in his public utterances in the past and has very often been wrong. He has been a reliable source of the “Bitcoin is based on nothing so is going to zero” kind of quotes that financial media companies love, and he has maintained that position even as BTC/USD has climbed to $70,000. Similarly, he has been voicing his concerns about equity pricing for a while now, even as the market has climbed to a series of all-time highs.
So, a “warning” from Jamie Dimon that there are potential negatives for the economy and the market ahead is not exactly breaking news. He has been saying it for months now, and during that time the economy has shown remarkable resilience, the market has soared, and JPM has continued to outperform other big bank stocks. There is no guarantee that all of those things will continue to dominate, but a dip in the stock on a repeat of a view that has proven to be irrelevant at best for so long looks like a discount to me.
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