It’s not often that you see a stock gain 4.6% after it missed analyst estimates on earnings. But that’s exactly what happened to JPMorgan Chase (NYSE: JPM) stock on July 15. The bank reported its numbers for Q2 2022 on Thursday, July 14, and the stock fell 3.5%. However, the very next day, it surged upward. What changed overnight?
There were two major reasons for this upward movement. The first one was that its peers, like Citigroup (NYSE: C) and Wells Fargo (NYSE: WFC) reported numbers that infused confidence in markets when it came to bank stocks.
The second reason was that normally-hawkish members of the U.S. Fed said they would support a hike of 75 basis points for interest rates at the Fed meeting next month. Fed Governor Christopher Waller and St. Louis Fed President James Bullard gave the markets a pleasant surprise after these announcements. Markets were expecting a hike of 1 full percentage point.
A look at JPM’s Q2 earnings
JPM’s revenue came in almost flat at $30.7 billion for Q2 compared to estimates of $31.81 billion. Its earnings per share were down 27% to $2.76 compared to forecasts of $2.92. Its net income came in at $8.65 billion, a fall of 28% from the same quarter last year. As interest rates have risen and the housing market has cooled down, the bank was compelled to reduce its employee base in its mortgage division.
The biggest bank stock in the U.S. saw its gross investment banking revenue fall 32% to $788 million. It also increased provisions for credit losses to $1.1 billion. The company said that it has temporarily suspended share buybacks as the focus shifts to increasing capital and its capital ratios in order to meet potentially higher requirements in 2023 and 2024.
JPMorgan is a blue-chip stock
On the whole, CEO Jamie Dimon is positive about the business and the environment. During the earnings call with analysts, Dimon said, “We invest. We grow. We expand. We manage through the storm and stuff like that.” He added, “Consumers are in good shape. They're spending money. They have more income. Jobs are plentiful. They're spending 10% more than last year — almost 30% plus more than pre-Covid.”
However, this outlook came with a warning as well. Dimon explained, “But geopolitical tension, high inflation, waning consumer confidence, the uncertainty about how high rates have to go and the never-before-seen quantitative tightening and their effects on global liquidity, combined with the war in Ukraine and its harmful effect on global energy and food prices are very likely to have negative consequences on the global economy sometime down the road.”
This isn’t the first time Dimon has warned of a tough environment. In June, he said that an economic hurricane was approaching. Clearly, now he feels that the hurricane has moved closer.
Banks do well in a mildly inflationary environment. When the Fed raises interest rates, banks follow suit, and mortgages, cars, and credit cards become slightly more expensive. Higher interest rates are good for a bank’s bottom line. However, if inflation goes up too much too quickly, consumers cut down on expenses, and borrowings fall, which negatively impacts a bank’s numbers.
What next for JPM stock and investors?
Shares of JPMorgan are currently priced at $114.5, and the consensus target on the stock is $163.24, a potential upside of 44.52%. JPM has lost 30.15% in 2022, and the stock is trading at a solid discount.
Over the last 5 years, JPM stock has returned a total of 45% to its shareholders, while the S&P 500 has moved up 71% in the same period. Clearly, the stock is a laggard by a wide stretch. Could the coming months see JPM stock outperform the broader markets? It seems possible. The bank has factored in a lot of headwinds in the near future and has taken steps to mitigate them. There is a possibility that the stock might fall further, but it could just be another buying opportunity.