Financial stocks in 2018 didn’t deliver the sort of returns one would expect in rising rate environment. The sector was down 15% and was one of the worst-performing groups in the entire market. But it’s a new year.
The Financial Select Sector SPDR ETF (XLF) is up 2.5% so far in 2019, while the SPDR KBW Bank ETF (KBE) has risen 7%. Among the biggest gainers is JPMorgan Chase (JPM), which will report fourth quarter fiscal 2018 earnings results before the opening bell Tuesday. On a relative basis, JPM was a solid performer compared to its peers. Investors have applauded not only JPM’s execution, but also the bank’s plans to take on the discount brokers with its new commission-free arrangement.
But while JPM is broadly regarded as the best among its “too big to fail peers,” not everyone is ready to sing its praises. Ahead of Tuesday’s results, JPM stock last week received a downgrade by Jefferies analyst Ken Usdin. Citing the likelihood of a top-line miss, Usdin reduced his rating from Buy to Hold, while trimming his price target from $130 to $110. JPM stock closed Friday at $99.91, which means that Usdin’s reduced target still calls for a 10% premium.
With news that the Fed may be more “balanced” in 2019 with regards to interest rates, Usdin’s Hold rating seems prudent. On Tuesday analysts will want confirmation that the bank can overcome near-term challenges, whether self imposed or due to exterior factors such as global trade.
For the three months that ended December, analysts expect the New York-based bank to earn $2.21 per share on revenue of $26.9 billion. This compares to the year-ago quarter when earnings came to $1.76 per share on revenue of $25.45 billion. For the full year, earnings are projected to rise 32% year over year to $9.23 per share, while full-year revenue of $110.78 billion would rise 7% year over year.
News about a possible trade agreement being forged between the U.S. and China has given investors a reason to be optimistic about stocks. For JPM, however, investors will look for improvements in the bank’s credit businesses (commercial and industrial), rising net interest margins (the equivalent of earnings) and stable net-charge-off rates. Improvements in these areas will allay investors’ concerns about revenue in an environment where fewer interest rate increases is expected by Fed this year.
As such, JPM must find other means to boost the top line. Elsewhere, to the extent the bank on Tuesday can deliver stronger performances in the mortgage business, asset management and trading, JPM — which has beaten Wall Street’s earnings estimates in twelve straight quarters — would have done enough to assert its best-of-breed status.