Weak US bank results are drowning the indices 📉

The season of quarterly results of Wall Street companies opened today and traditionally started with US banking sector results. The stocks, JP Morgan and Morgan Stanley are losing in the face of disappointing results and dragging down US indices. The weak start to the new season raises concerns around the season going forward, with analysts clearly expecting a slowdown:

JP Morgan

EPS $2.76 vs. expected EPS of $2.88 ( $3.78 in Q2 2021)

Revenue $31.63 vs. expected $31.81 billion ($30.5 billion in Q2 2021)

Morgan Stanley

EPS of $1.39 vs. expected EPS of $1.53 ($1.89 in Q2 2021)

Revenue $13.13 billion vs. expected $13.48 billion ($14.76 billion in Q2 2021)

• Banks are clearly trembling at the prospect of a recession that could cause some customers to default. The joy of the rate hike thus seems to be balanced downward by concerns around an economic slowdown becoming a reality. JP Morgan CEO Jaimie Dimon warned of a 'financial hurricane' as early as June and prepared the bank for a defensive monetary policy by building up reserves;
• JP Morgan has decided to abandon its share repurchase program, which investors had feared as early as Q1 2022. In addition, the company has not raised its dividend per share recently (some of its competitors have done so) which further weakens bullish sentiment. The company explains that the buyback program was put on hold to maintain regulatory reserve requirements and is temporary;
• Paradoxically, despite rising interest rates, which in theory should favor the financial industry, analysts around the world are lowering their growth forecasts for companies in the banking sector. Against the backdrop of an economy that is sending worrying signals, the Fed's monetary tightening and rising inflation could negatively affect consumer health and undermine banks' revenues. This was also pointed out by JP Morgan CEO Jaimie Dimon who commented more broadly on the macro situation today. The CEO pointed out that problems in geopolitics, along with rising inflation and energy prices and complications in supply chains, will weigh on the economy in the long term. At the same time, the bank chief indicated that the condition of US consumers remains 'healthy' and the labor market strong;
• Analysts expect a weakened condition of the overall financial industry (down nearly 24% y/y in earnings), which could weigh powerfully on US indices like the S&P500. Profits related to consumer finance could fall by as much as 35%. Overall, FactSet forecasts a very modest 4.3% earnings growth for the S&P 500 in Q2, suggesting that WallStreet is gearing up for an overall very weak earnings season. Margin declines by major companies well below investors' expectations could contribute to another phase of capitulation by market bulls;
• The dismal earnings readings from investment bankers Morgan Stanley (nearly $1 billion in profit vs. more than $1.4 billion in forecasts) and JP Morgan (down 54% y/y to $1.65 vs. $1.9 billion in forecasts) confirm that a spike in market volatility and fear is definitely not conducive to industry margins. This, in turn, casts a shadow over the investment banking performance of other banks and financial institutions from the so-called 'BigThree' like StateStreet and BlackRock;
• The activity of sellers of so-called 'insiders' has far outstripped buyers of JP Morgan shares. In the last 3 months, the ratio is close to 3.5:1 advantage of sellers of the stock. Over the past 12 months, the insider statistic is even weaker, with nearly 40 times more company shares sold than purchased;
• JP Morgan pointed to a $428 million increase in provisions for 'bad loans' as one of the reasons for below-market consensus results. Analysts at FactSet correctly predicted that banks would report higher loan loss provisions (reported as expenses) against Q1 2021. This indicates the increasing likelihood of insolvency of some customers, which may weigh on banks. It can be seen that the trend of low reserves from the time of the pandemic is reversing and returning to pre-pandemic levels. Analysts predict that reserves will limit banks' profit growth throughout 2022, which, compared to the good results of 2021, may make the disappointment of bank bulls all the more acute. At the same time, the scale of the gap may gradually narrow over the remainder of the year;
• Fatal sentiment in the U.S. banking industry is also lending itself to other stock exchanges. Declines in the valuations of the banking and financial industry may also weigh powerfully on US indices like the S&P500. A worrisome prediction for bulls was also issued by the BlackRock fund, which conveyed that the 'buy the dips' investing method may no longer be appropriate in the context of changing economic conditions and lowered its forecast for the global stock and bond market. Analysts at FactSet expect the performance of the banking sector as a whole to decline by 26% year-on-year.

JPMorgan (JPM.US) stock chart, W1 interval. The stock has been moving in a dynamic downtrend since the fall of 2021, which coincides with the activity of so-called insiders, who have sold nearly $1.2 million of the company's shares over the past 12 months against less than 26,000 bought. The statistics also show intense insider selling at levels above $150 and declining sales over the past 3 months (still outpacing buying, however). The stock price will follow covid valuations from the fall of 2020, which illustrates the dire sentiment around bank stocks. A weak opening may herald an attempt by supply to attack levels at $103, where there is a 71.6 Fibonacci retracement, defending the psychological barrier of $100 per share. A drop below these levels could herald prolonged weakness and potentially foreshadow an imminent, gradual rise in interest from bulls looking for opportunities. Source: xStation5