US bank earnings fail to boost market mood

JP Morgan, Wells Fargo and Goldman Sachs reported $83.6bn in combined Q3 revenues, however, this has not been enough to lift the market mood. US equity market futures are still pointing to a lower open later today, and the Vix is higher. The US’s largest banks are not moving in a block on the back of this earnings season, although Wells Fargo’s share price is rising in the pre-market, Goldman Sachs’ s share price is lower by 2% and JP Morgan is relatively flat.

Any excuse to sell JP Morgan?

JP Morgan reported revenues of $47.1bn, and net income of $14bn, the market was less impressed by the net interest income miss of 2.45%, analysts had been expecting 2.5%. With nearly five interest rate cuts priced in for the Fed between now and the start of 2027, this could be the peak for NIM. In fairness, analysts should have expected this, we think that today’s uninspired price action after a strong earnings report from JPM was an excuse to sell the stock after a strong run for the US banking sector in recent months.

Loan losses manageable for now

Loan loss provisions are also getting scrutinized during this earnings season, and JPM has set aside $3.4bn, which is slightly higher than analysts expected. This is not a worrying sum, and it suggests that any losses the bank accumulates can be well absorbed and are unlikely to threaten the stability of the financial system. Even the recent bankruptcies of Tricolor and First Brands in the US have had no material impact on the US’s largest lenders, JPM has written off a mere $170mn related to Tricolor losses.

US jobs market leading to uncertainty, not panic

Overall, the bank did not sound worried about the credit quality of its customers, and it did not see any cracks appearing in the credit markets, although there are some signs of weakness in the labour market. JPM said that uncertainty in the labour market was not causing problems for the bank, which suggests that the US jobs market, although softening, is not falling off a cliff.

The bank also noted how the incredible rally in risk assets like stocks, were driving revenues in its wealth management business. Other business segments also posted earnings beats, including fixed income sales and trading, which saw revenues beat estimates and come in  at $5.61bn, equity trading posted revenues of $3.3bn, and investment banking revenues were also stronger than expected at $2.69bn, vs. expectations of $2.67bn.  

JPM’s boss Jamie Dimon did puncture some did good news in this earnings report. He said that private credit markets remain a risk due to a lack of transparency. Dimon also warned about the risk of price pressures and potential stagflation.

Strong trading revenues to remain

In terms of forward guidance, the bank said that it expects trading revenues to remain strong, even if markets fall back from current levels. JPM’s trading business has grown significantly in the last 5 years and it does not see this reversing, since the trading business has grown so much. This is positive news, since trading desks are once more an important source of revenue for the world’s largest bank.

Investors favour less highly valued banking stocks this earnings season

There is something for the bulls and the bears in JPM’s Q3 results, and that is why the stock continues to oscillate between small gains and small losses so far on Tuesday. Wells Fargo is extending gains in the pre-market to more than 3% after it reported a higher return on common equity, and said that it would aim to achieve a 17-18% ROE in the future. The bank also reported stronger investment banking income and other non-interest income that beat analyst estimates. Traders are willing to ignore misses on net interest income, as rates are likely to fall further from here, however, they want to see good news on other profitability metrics.

One reason why the market is cooling on JPM and willing to buy Wells Fargo is that JPM has outperformed Wells Fargo so far this year, as you can see in the chart below. Also, Wells Fargo is trading at 12 times forward earnings, vs. 15 times for JPM. Thus, positive results, plus an attractive valuation, could entice investors at this stage of the stock market rally.

Goldman’s stock under pressure even with earnings beat

Goldman Sachs stock is also under pressure in the pre-market and is lower by 3%, even though it reported a 42% rise in investment banking fees and robust income from its trading and capital markets desks. It also reported a large increase in wealth management revenues and roughly stable loan loss provisions compared to a year ago.

The US’s largest banks are not moving in a unified block on the back of these Q3 earnings reports, and we think that because Goldman, like JPM, is trading at a slightly higher multiple than other US banks, this is causing its stock market weakness after robust earnings reports. It also suggests that lots of the good news was already priced in. However, the strength of the results suggest that the downside is not justified by the fundamentals, and any sell-off could be temporary.

Chart 1: JPM and Wells Fargo

Source: XTB and Bloomberg