JPMorgan Earnings Were “Artificially Good,” Here’s Why

Stocks continued their upward trajectory this morning, buoyed by a strong start to the earnings season, before flattening out through noon. The Dow Jones Industrial Average rose by 120 points, or 0.3%, while the S&P 500 and Nasdaq Composite posted meager gains of 0.1% and 0.2%, respectively.

Today’s inactivity comes on the heels of Wall Street’s strong performance yesterday, with both the Nasdaq and S&P 500 hitting their highest levels since April of the previous year.

Among the day’s winners, JPMorgan Chase saw its shares rise 1% after its Q2 results surpassed expectations. Boosted by higher interest rates and increasing interest income, JPMorgan’s robust earnings performance set a positive tone for the banking sector. This was further supported by Wells Fargo’s shares, which also climbed more than 3% following the release of their better-than-expected results.

JPMorgan reported revenue of $41.3 billion and adjusted revenue of $42.4 billion, both surpassing the consensus estimate of $39.34 billion and setting new records. The bank also boasted an impressive diluted EPS of $4.75, with an adjusted EPS of $4.37, comfortably beating the estimates of $4.00. Net interest income came in at a record-setting $21.8 billion, boosted by a $2.7 billion gain from scooping up First Republic accounts.

However, the bank’s success wasn’t without some problems. Had it not been for the First Republic bailout, JPMorgan could have potentially faced another situation reminiscent of the ‘London Whale’ debacle, when a JPMorgan trader lost the company an estimated $2 billion in 2012 which turned out to be a $6 billion loss. Questions were raised about the $900 million pretax loss in investment securities and its implications.

Interestingly, the earnings report suggested that the First Republic acquisition may have artificially bolstered some numbers.

While net income rose by 67%, without First Republic, this increase would have been only 40%. Similarly, net revenue increased by 34%, but without First Republic, this would have been a rise of only 21%.

These figures could be interpreted to suggest that the First Republic acquisition has served as a convenient buffer, painting a more favorable financial picture for JPMorgan that other banks won’t enjoy.

The report also highlighted the bank’s effective income tax rate reduction to 17.7% in Q2, from 20.9% in Q1 and 20.4% in Q2 of the previous year. This decrease was attributed to income taxes associated with the First Republic acquisition, contributing to a reduction in the bank’s effective tax rate by 3.4 percentage points.

Despite these caveats, JPMorgan CEO Jamie Dimon conveyed optimism in his comments about the earnings report, stating, “Almost all of our lines of business saw continued growth in the quarter.” He also highlighted potential risks including high core inflation, quantitative tightening on an unprecedented scale, large fiscal deficits, and the ongoing war in Ukraine.

Lastly, touching on JPMorgan’s future prospects, it raised the net interest income guidance for the year from $84 billion to $87 billion, excluding its trading business. This forecast upgrade prompted Alison Williams of Bloomberg Intelligence to predict a potential 2% increase in JPMorgan’s 2023 revenue.

With a healthy start to the earnings season, market sentiment appears cautiously optimistic. And because economists set such a low bar for earnings this season – down 7% year-over-year for total S&P earnings – it will be very easy for companies to post impressive “beats,” potentially lifting shares as the corporate buyback window opens back up on July 28th.


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