Earnings from big banks are complicated. Modern national banking chains have their fingers in so many pies and are structured with so many layers that the quarterly reports inevitably contain a lot of information, information that often sends contrary signals. Because of that, the early perception of, and reaction to, their earnings are often more about the mood of the market than the numbers themselves. That, and a focus on headline numbers, can lead to an initial reaction that is not really indicative of what the report tells us.
That seems to be what happened this morning when both JPMorgan Chase (JPM) and Morgan Stanley (MS) released their calendar Q2 results.
Both missed on the top and bottom lines, so a negative initial reaction was understandable, especially given that futures were pointing to a lower opening in the broader market. The poor results in investment banking, the banks adding to their loan loss reserves, and the suspension of share buybacks by JPMorgan all confirmed the market’s fears that corporate America was preparing itself for some tough times ahead. But then, not long after the release, something strange started to happen: Both stocks bounced somewhat and made back most of their early losses.
Of course, this could be just a technical trading thing; profit taking by those who went in short or sold early, for example, but it could also be something else. It could be that even though both companies missed expectations, their numbers, once all things were considered, weren’t all that bad.
The poor investment banking results really just confirmed something we already knew. Corporations are wary of inflation down the road, the Fed’s reaction to that, the war in Ukraine, continued Covid disruption of the supply chain, and probably other things too. IPOs, mergers, and takeovers have all slowed, so a slowdown in investment banking profits was inevitable. However, it is only something to really worry about if those fears prove to be fully justified rather than the result of an abundance of caution from C-suites that remember the devastation of the pandemic shutdown all too well.
Loan loss provisions, too, are about caution, but for different reasons. Post 2008, banks are conservative when it comes to reserves set aside to allow for bad loans. That is a product of both a “once bitten, twice shy” mentality and more stringent regulatory requirements, but it doesn’t necessarily indicate a looming recession. In that light, JPMorgan’s adding $428 million to reserves as opposed to reducing them by $3 billion in the same quarter last year looks a bit less of a recession signal than it may have at first.
If anything, the fact that both banks did relatively well in their core consumer businesses sends the opposite message. Inflation is worrying and is impacting everyone but, so far, consumers haven’t slowed up on credit card usage and other spending metrics. This is the great contradiction that the market is grappling with right now. Usually, corporations pull back in response to a consumer slowdown, but these reports reinforce the idea that we are currently seeing the opposite to that. Corporations are pulling back, even as consumers continue to spend. If that dynamic leads to mass layoffs and high unemployment, it will be a problem, but the job market is still tight and wages are still rising, so that seems some way off.
As so often seems to be the case, then, bank earnings have clouded, not clarified, the big picture. Those reading into them and finding hidden messages about the economy are overanalyzing. The simple fact is that both JPM and MS had understandably bad quarters in some areas, notably investment banking and wealth management, where lower asset prices will have hurt their fee income, but decent ones elsewhere. Both stocks are now indicating that the overall picture was mildly negative, but not the sign of impending doom that some might have you believe.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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