(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
JPMorgan Chase & Co. (JPM), the largest U.S. bank with a market value of over $330 billion, and its CEO Jamie Dimon, are scheduled to report fourth-quarter results on January 15 before the open of trading. However, rising stock market volatility, falling interest rates, and weak homes sales may weigh on the bank’s fourth-quarter results.
Overall expectations for the fourth quarter have been trending lower. Since the beginning of December, earnings estimates have dropped 3% while revenue estimates have fallen 2%.
The Bank Faces External Headwinds
In the fourth-quarter, yields fell sharply as equity market volatility picked up substantially. Investors worried about an overly aggressive Federal Reserve and that slowing growth may trigger a recession. It resulted in interest rates on the 10-year Treasury falling roughly 55 basis points from the beginning of October to approximately 2.70% by December 31. Also, 2-year yields fell nearly 50 basis points to 2.5% by the end of the year. The declining interest rates may have a negative impact on the bank’s fourth-quarter net interest income. In the third quarter, the bank noted that rising interest rates helped to boost net interest income 7% from a year ago to $14.1 billion.
The falling interest rates in the fourth quarter helped to push mortgage yields lower with the 30-year national average falling 45 basis points to around 4.5% by year's end. The lower rates may help to stimulate the housing market and act as a tailwind for the bank’s 2019 loan growth. However, it is unlikely to help the bank in the fourth quarter as home sales slowed dramatically. The U.S. Pending Homes Sales Index dropped to its lowest level since 2014. JPMorgan had seen a steep 16% decline in its home lending business in the third quarter; the housing slowdown likely weighs on that further.
JPMorgan may see falling interest rates and volatility in the stock market give its investment banking unit’s revenue a boost. The tumbling stock market may have helped to spur increased equity trading volumes for JPMorgan during the fourth quarter. The equity market segment had a strong third quarter with revenue rising 17%. Meanwhile, falling yields would suggest bond buying among investors and that could help the bank’s struggling fixed income unit, which saw revenue decline 10% last quarter.
Weaker Long-Term Outlook
Analysts estimate a much weaker year for JPMorgan in 2019 with revenue expected to grow 3%, down from a growth rate of 14% in 2018. Additionally, earnings are estimated to increase by 7% in 2019, down from 44% last year. The outlook for 2020 is worse, with earnings and revenue projected to grow less than 1%. Worse still, 2019 growth for JPMorgan is expected to be much slower than rivals, Citigroup and Bank of America, which are forecast to grow their earnings by 13% and 11% in 2019, respectively.
The Stock May Struggle in 2019
With the stock roughly 16% off its 2018 high, its valuation using price to tangible book value has fallen considerably but still isn’t cheap at 1.88. Should that multiple fall back to the historical range, the valuation may drop to 1.6. The stock is also more expensive than the other two money center banks, Citigroup and Bank of America.
The options for expiration on March 15 are bullish on the stock, with the number of calls outweighing the puts by about 3-to-1 with 12,000 open call contracts. The long straddle suggests the stock could rise or fall by 8% from the $100 strike price, placing the shares in a trading range of $91.85 to $108.15 by expiration. The betting suggests a bullish outlook for the stock following fourth-quarter results. However, the point of view over the long-term is more bearish using January 17, 2020, $100 strike price options. That strike price shows that the puts outweigh the calls by a ratio of more than 2-to-1, with almost 13,000 open put options.
The technical chart is also extremely bearish with a strong level of technical resistance at $102. The stock also has a firm downtrend which has been in place since July. Should the equity fall below technical support at $94, it could drop to as low as $87.
The relative strength index has also been steadily trending lower since the beginning of 2018 and suggests that momentum is still coming out of the stock. There does not appear to be a reversal of this trend on the horizon.
JPMorgan and its stock are likely to struggle in 2019 as risks for a global economic slowdown continue to threaten the bank's many critical areas of business. Factor in a steep valuation for the stock, a bearish long-term view from the options, and a troubling technical chart, 2019 is unlikely to be easy for the company or the stock.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.