Why JPMorgan Chase’s Earnings “Beat” Was Actually a “Miss”

JPMorgan Chase CEO, Jamie Dimon

Another day, another uneven trading session.

That’s been the trend over the last few weeks.

And with investors unsure of where the market is truly headed, more volatility is likely in store as earnings season gets underway.

As of noon, equities remain “crisscrossed,” even following the release of better-than-expected JPMorgan Chase (NYSE: JPM) revenues.

The Dow is up a surprising 0.80% while the S&P trades only 0.20% higher. The Nasdaq Composite, meanwhile, has dropped 0.65%.

In yesterday’s afternoon rout (spurred on by new California lockdowns), Big Tech (mostly FAANG and Microsoft) dragged down the rest of the market.

Today, those same stocks have fallen over 1% collectively, keeping the tech-heavy Nasdaq Composite in check.

But for the rest of the market, banks are doing the heavy lifting. Sentiment-wise, at least.

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JPMorgan Chase reported an earnings “beat” this morning, and in doing so, gave bulls hope that more good news could be on its way.

The company enjoyed a massive 79% surge in trading revenues, driven by strong fixed income markets. Bond traders alone posted revenue of $7.3 billion. The winnings marked a 120% increase in returns year-over-year, blowing away the analyst estimate of $5.84 billion. Equities traders did well, too, and raked-in another $2.4 billion. They also beat their estimate of $2.07 billion.

As a result, the bank easily surpassed its total revenue estimate ($33 billion vs. $30.3 billion expected) and earnings per share estimate ($1.38 vs. $1.04 expected). Bank stocks initially surged on the news.

JPMorgan Chase CEO Jamie Dimon, despite the impressive Q2 results, tried to temper shareholder expectations shortly after earnings were released. He warned investors that the path forward remains unclear in his lukewarm guidance.

“Despite some recent positive macroeconomic data and significant, decisive government action, we still face much uncertainty regarding the future path of the economy,” Dimon said in a press release.

“However, we are prepared for all eventualities as our fortress balance sheet allows us to remain a port in the storm.”

The biggest issue with the bank’s earnings had to do with its retail banking division, which posted a $176 million loss in Q2. Last year, it logged a $4.2 billion profit in the same quarter.

With the market nearing the end of a historic, extended rally, JPMorgan Chase’s trading gains are unlikely to be repeated any time soon. Dimon knows it. That’s why he undersold his company’s earnings via press release.

States – like California – are rolling back reopening measures. If the banks can’t get their retail banking divisions back on track soon, Q3 earnings are likely to disappoint, unaided by sky-high trading revenues.

Investors seemed to realize that as the trading session progressed. JPM shares are now up only 0.15% on the day.

And unless other banks can buck the trend when they report earnings this week, the market will learn the two truths about the current U.S. economy:

  1. Another lockdown would be disastrous. And…
  2. The stock market simply cannot crash again if American financial institutions are to survive.

The former is starting to happen in certain parts of the country. The latter could eventually happen if the Fed throws in the towel.

And as noted by Mohamed El-Erian, chief economic advisor at Allianz, a wave of non-payments could soon be approaching – an event that would put stress on almost every part of the U.S. economy. Banks included.

“The potential damage is not limited to finance,” El-Erian said in a Financial Times op-ed, referencing the increased number of delinquent rents and corporate bankruptcies that have occurred within the last month.

“Disruptions in capital markets could also undermine the already sluggish economic recovery by making consumers more thrifty, as they worry about their job prospects, and by encouraging companies to postpone investment plans pending a clearer economic outlook.”

Retail investors are in on the act, too. Robinhood traders have successfully pumped-up a number of weak stocks in a speculative blitz. When the bubble pops, many of these amateur traders stand to lose a sizable chunk of their savings, drawing down slush funds (and spending money) in the process.

Simply put, most of the market is not exhibiting the appropriate level of concern. If the major indexes are to rise further, they’ll need an ahead-of-schedule vaccine or “V-shaped” economic recovery to do so.

Thus far, we have neither. And JPMorgan Chase’s earnings report this morning, impressive as it may have been, did little to change that.

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