JP Morgan Beats Estimates, But Citi Misses On Revenues

JP Morgan - Slight Decline In Overall Stocks

In the week where the S&P 500 is likely to reach a new record high, the market started with a dud on Monday. S&P 500 fell 6 basis points, Nasdaq fell 0.10% and Russell 2000 fell 0.36%. VIX increased 2.58% to 12.32 which is still extremely low. Somehow this small decline in stocks pushed the CNN fear and greed index down 6 points from 74 to 68.

Perhaps it fell because the market needs heightened near term momentum to drive the index to the extreme greed category. Junk bond demand is bringing this index down as it is in the fear grouping.  The junk bond spread over investment grade debt is 1.73%. 

Since March the spread has increased; although it as fallen in the past 2 weeks. Because the VIX is reviewed in relation to its 50 day moving average, it is in the neutral category even though on a historical basis, the VIX is very low.

JP Morgan - Sector By Sector Review

On Monday, most sectors fell. The 2 biggest winners were consumer staples and healthcare as they increased 0.69% and 0.34%. Finally, healthcare outperformed; it has been having a terrible year. 

It is only up 5.83% which is much below the S&P 500’s increase of 15.93%. The 2 worst sectors were the financials and real estate as they fell 0.62% and 0.6%.

JP Morgan - Big Bank Earnings

After soaring 4.69% on earnings on Friday, JP Morgan stock fell 1.14% on Monday. JP Morgan had a great earnings report as EPS was $2.65 which beat estimates by 30 cents. Profits were up 5% year over year to $9.18 billion. Revenue was up 5% to $29.9 billion which beat estimates by $1.5 billion. 

Net interest income increased 8% because of higher rates. That’s interesting because in the past few months rates have cratered. The increase in net interest income was seen in the retail segment as profits increased 19% to $3.96 billion. 

JP Morgan’s CEO made the following comment after his firm reported record earnings: “Even amid some global geopolitical uncertainty, the U.S. economy continues to grow, employment and wages are going up, inflation is moderate, financial markets are healthy and consumer and business confidence remains strong.” 

JP Morgan - So much for the recession the bears have been calling for in the past 6 months.

Citigroup stock fell 6 basis points on Monday as it reported an EPS beat and a revenue miss. While Citigroup stock outperformed the financial sector and JP Morgan on Monday, it underperformed JP Morgan on Friday as its stock increased 2.29%. No bank can compare to the gold standard that is JP Morgan.

Specifically, Citigroup reported $1.87 in EPS which beat estimates by 7 cents. Revenues were $18.576 billion which missed estimates for $18.634 billion. The firm’s net interest margin increased 1 basis point to 2.72%. Fixed income, currencies, and commodities trading revenue beat estimates for $3.05 billion as they came in at $3.452 billion. 

Equities trading missed estimates for $930 million, coming in at $842 million. Finally, investment banking revenue of $1.354 billion beat estimates for $1.2 billion.

JP Morgan - Earnings Are The Catalyst To Watch In April & May

Earnings season is the biggest catalyst for stocks in the next 4-6 weeks. As you can see from the table below, stocks have gotten much more expensive in the past few months. That’s what happens when earnings fall and stocks increase rapidly. 

Stocks were a huge buy on January 1st, 2019 as the S&P 500’s forward PE ratio was only 13.92. You could only justify that valuation if a recession was coming or if interest rates were headed much higher. Neither were the case as the economy is likely growing between a 1.5% and 2% annualized pace in Q1 and interest rates have collapsed.

The value proposition for stocks is much worse now that the S&P 500’s forward PE ratio is at 16.7. You’re paying for the knowledge that the economy isn’t headed for a recession, interest rates have fallen, and the Fed is pausing rate hikes. The Fed’s next meeting is in 15 days; the chances of a cut this year are only 37.5%. 

When I say you’re paying for knowledge, I’m presenting the point that uncertainty pushes stocks lower. When aspects of monetary policy, markets, and the economy become clearer, it makes sense to have higher multiples. That being said, when you buy stocks at 16.7 times forward earnings, you’re betting that estimates are beaten resoundingly, estimates move higher, or that multiples move up. I don’t see the multiple moving up much and I don’t see estimates rising. Bulls need Q1 earnings season to be great.

JP Morgan - Q1 Earnings Season Has Been Solid

So far, earnings season has been good because firms are beating estimates by more than the 3 year average. Plus, Q2 estimates have been falling much slower than Q1 estimates fell last quarter. 15 of the first firms 29 to report results have had their estimates cut on average by 2.82% afterwards.

As you can see from the table below, Q1 EPS is down 1.24% yearly. That’s not much. Earnings fell much worse in the last earnings recession and stocks never fell 20%. Q2 estimates fell from 5% growth at the start of the year to 2.33% on March 1st

The decline has been modest lately as estimates have fallen from 2.04% on April 1st to 1.79% growth as of April 15th. Q4 estimates are still very high because Q4 2018 had the lowest growth of the year. It will be interesting to see if that optimism keeps up. I could see high single digit earnings growth reached if the economy recovers by the end of 2019 like the ECRI leading index suggests.  

JP Morgan - Conclusion

The rally to start the year was based on multiple expansion. For stocks to rally in the rest of the year, estimates need to be beaten and solid guidance needs to be provided. 

So far, this earnings season has been solid. Both Citigroup and JP Morgan beat estimates, but only the latter beat sales estimates. 

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