Back to top

Image: Bigstock

JPMorgan (JPM) Jumps 6.2% on Bullish Profit & Economic Picture

Read MoreHide Full Article

JPMorgan (JPM - Free Report) stock climbed 6.2% yesterday, the biggest one-day rally since November 2020, after offering optimistic views on its profit targets and the U.S. economy at the Investor Day conference. The stock was not only one of the biggest contributors to the S&P 500 rally but also led to significant gains for other industry players.

The investors were bearish on the banking industry as aggressive interest rate hikes by the Federal Reserve could pave the way for a recession in the U.S. economy. But JPMorgan, through its upbeat outlook, has tried to douse the recession fears. The KBW Bank Index jumped 4.1% and the other three big banks – Bank of America (BAC - Free Report) , Citigroup (C - Free Report) and Wells Fargo (WFC - Free Report) – were among the top gainers, with their shares rising more than 5%.

Net Interest income (NII) Gets a Lift, Expense Outlook Reiterated

One of the biggest takeaways from JPMorgan’s Investor Day was there is no imminent recession risk despite the central bank’s promise to control raging inflation by aggressively increasing interest rates. The company, through presentations, noted that it expects the Fed Funds target rate to reach 3.00% by this year-end.

This, along with high-single-digit loan growth (excluding CIB Markets & PPP) and relatively stable deposit growth, will result in NII (excluding CIB Markets NII) reaching nearly $56 billion in 2022. This is up from the prior target of $53 billion and marks a jump of almost 25% year over year.

On the expense front, JPMorgan affirmed its prior target of $77 billion or approximately 8% year-over-year rise for 2022. The top management noted costs related to technology, new products and marketing are all necessary to stay ahead of the competitors that only include other banks but also technology firms.

For next year, management anticipates expense growth to moderate. The company will be spending to hire talent across all its segments.

Further, JPM expects net charge-offs to remain at low levels this year and rise to pre-pandemic levels only after 2022 on robust consumer and business balance sheets. Thus, this too puts to rest any speculations about weakness in the U.S. economy.

Also, management now expects that it may reach its target for a 17% return on tangible capital equity (ROTCE) in 2022. Earlier this year, JPMorgan had pushed back the timeline for achieving this target.

Talking about its initiatives to expand the U.K. consumer digital bank, JPMorgan, which already has more than 0.5 million customers and $10 billion worth of customer deposits, stated that it will likely report a loss of $450 million this year. The company expects its international consumer business to break even by 2027-2028.

Parting Thoughts

JPMorgan, which has a footprint in all banking businesses, remains at the top position. The company has been leveraging its scale and global reach to improve operating efficiency and profitability.

However, investors are worried about the company’s prospects, given the expectations that aggressive monetary policy tightening by the Fed will pull the economy into a recession. As the banking industry’s financials is dependent on the health of the economy, bank stocks have been getting hammered badly since the beginning of the year.

JPMorgan wasn’t untouched by this. In fact, the stock remains the worst performer among other Wall Street biggies BAC, C and WFC. The company’s shares are down 21.3% so far this year compared with a 20.6% decline for the industry. In the same time frame, BAC, C and WFC have lost 19.4%, 12.6% and 8.7%, respectively.

Year-to-Date Price Performance

Zacks Investment Research
Image Source: Zacks Investment Research

Following JPM’s Investor Day conference, it seems that recession fears are overblown and investors are too pessimistic about the banking industry’s prospects. Yet, one must keep an eye on macroeconomic developments before making any investment decision.

All stocks mentioned in the article – JPMorgan, Bank of America, Citi and Wells Fargo – carry a Zacks Rank #3 (Hold) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.