JPMorgan: What To Expect Of An Eventful Earnings Season

Summary:

The performance of financial services companies will be particularly interesting to monitor, as third-quarter earnings season approaches.

While robust consumer spending should be a tailwind again, interest rate trends and hard-to-predict investment banking activity turn me cautious.

In my view, JPMorgan has its house in order when it matters most, which makes the stock one of the best to own in the financial services sector.

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Since the Fed’s July 31 decision to cut rates for the first time in over a decade, the U.S. designated China a currency manipulator, the yield curve inverted for the first time in over 10 years, China and the U.S. ratcheted up their tariffs, and oil prices spiked as geopolitical tensions on the Arabian peninsula flared up.

This is a quick summary of the macroeconomic events of the third quarter of 2019 that must be causing investors to scratch their heads, as earnings season approaches. The performance of companies in the financial services sector, typically very much dependent on the health of the economy and the direction of interest rates, will be particularly interesting to monitor.

Credit: WOSU Radio

Tough environment
In the diversified banking space, I have reinforced a few times my preference for JPMorgan (JPM) as a "best-of-breed" company and stock to own. Yet, I do not expect the bank's most recent quarter to have been a walk in the park.

Perhaps the best news will, once again, come in the form of robust consumer spending boosting revenues in the large consumer and community banking segment (representing nearly half of JPMorgan's revenues last quarter). I would not be surprised to see loan balances, aided in great part by credit cards and maybe auto, increase by another 3% or 4%, excluding the impact of asset disposition.

The more complicated question to answer is whether the recent trend in interest rates will eat into JPMorgan's net interest margin, and to what extent. Generally speaking, an environment of robust rates and a steep, positive yield curve bode well for financial institutions that borrow relatively cheap and lend at more favorable terms.

Source: D.M. Martins Research, using data from U.S. Dept. of the Treasury

But as the graph above depicts, not only have interest rates been decreasing steadily in 2019, but the yield gap between the two-year and ten-year treasury instruments has all but vanished in the third quarter. And considering tough competition from direct banks that take advantage of lower opex to offer high interest on deposits, traditional banks could be pressured even more in a low-rate and inverted yield curve environment.

Also interesting to watch will be the more volatile and harder-to-predict investment banking business. Despite arguably having the best-in-class pipeline in the industry, JPMorgan failed to inspire in the most recent quarter - probably a result of trade policy uncertainties and the lingering impact of Brexit, the U.S. government shutdown and increase in market volatility in the previous periods. Given the recent interest rate movements, this would be a great time for JPMorgan to offset the potential headwinds on the consumer side with strong performance in investment banking.

Taking a step back

Generally speaking, I see risks to investing in the financial services sector increasing ahead of third-quarter earnings season. Were I to make long-short bets on the different sectors of the economy, I would probably not list banks as the most likely companies to outperform the market in the near future.

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Bio:

Hi, my name is Daniel Martins. I'm a research analyst out of California. One of my fans reached out to me via Seeking Alpha - where I primarily post my blog articles - and told me that my articles would do well to be cross-posted here on this steemleo platform.

I don't know much about this new platform right now, but this same fan has offered to do all the posting on my behalf and based on what I've been told, all the coins earned from these posts will be sent into this account. My articles are posted over on Seeking Alpha and a few other locations if you'd like to take a look at those. Otherwise, this fan will be posting my blogs here to this website from there while providing all the links back to my original source posts.