Will Q2 Earnings Bring Better Luck For JPMorgan (JPM) Stock?

Better-than-expected first quarter earnings – primarily abetted by negligible legal costs and effective cost reduction – failed to translate into any strength for the JPMorgan Chase & Co. (NYSE:JPM) stock, as evident from its lackluster performance since the results. The sell-off triggered by Brexit can be partly held responsible for this weakness. But not just that, it’s perhaps the overall business activity of the company that investors found unsatisfactory.

Things don’t look any better for the just completed quarter either, given no betterment in the interest rate environment and tepid demand for loans. In fact, a weak financial market and continued margin pressure might stifle revenues yet again. The Zacks Consensus Estimate for revenues of $23.8 billion indicates a marginal decline from the year-ago quarter.

While estimate revisions for Q2 earnings over the last 30 days don’t show conservativeness with most estimates moving higher, core business activities might not live up to investors’ expectation. So the stock might not have any better luck after the company releases second-quarter results on Jul 14.

With increasing expectations in terms of the earnings number, the chance of a beat is dim. And an earnings miss will put further pressure on the stock.

JPMORGAN CHASE Price and EPS Surprise

JPMORGAN CHASE Price and EPS Surprise | JPMORGAN CHASE Quote

Our quantitative model also doesn’t point to an earnings beat. Here’s why:

JPMorgan doesn’t have the right combination of the two key ingredients – positive Earnings ESP and a Zacks Rank #3 (Hold) or better – for increasing the odds of an earnings beat.

Zacks ESP: The Earnings ESP for JPMorgan is -0.70%. This is because the Most Accurate estimate of $1.42 is lower than the Zacks Consensus Estimate of $1.43.

Zacks Rank: JPMorgan carries a Zacks Rank #3, but this alone isn’t enough to increase the chance of an earnings beat.

Looking at the fundamentals, here are the factors that should be at play:

Early optimism on trading revenues may fade away: Based on impressive trading activity in the first two months of the quarter, management hinted at an increase in trading revenues in the mid-teens. At an industry conference early in June, the firm’s investment bank chief Daniel Pinto said that trading momentum witnessed in March continued in April and May. While client activity was feebler in equities, it was higher for fixed income. However, the firm’s experience in June, which is still unknown to the market and not expected to be good for trading and investment banking because of Brexit and other macro concerns, may offset the early momentum.

Investment banking business likely to remain weak: JPMorgan’s revenues from advisory and underwriting may have been dampened by the persistent decline in M&A activities and a weakening IPO market in the wake of global economic concerns. Further, continued shift toward electronic platforms may have weighed on investment banking.

Mortgage business may have gained momentum: Lower mortgage rates might have given mortgage revenues for JPMorgan a boost, as people may have rushed to get homes financed to avoid higher rates later. However, any significant improvement in outstanding mortgage loans is unlikely as the volume of repayment and charge-off of mortgage loans was more than fresh originations.

Energy sector lending should not be a big pain: While energy loans are still a concern, the provision requirement should not be as high as it was in the first quarter, thanks to the recovery in oil prices. The chance of its energy loans turning into bad loans lowered in the quarter.

Expense management remained efficient enough: JPMorgan continued with its efforts to keep expenses at check. There were no major outflows related to legal settlements that might impact the firm’s earnings unusually in the to-be-reported quarter.

Stocks That Warrant a Look

Here are a few bank stocks that you may want to consider, as our model shows that these have the right combination for an earnings beat this time around:

Comerica Incorporated (NYSE:CMA) , which is expected to report on Jul 19, has an Earnings ESP of +1.47% and a Zacks Rank #3.

Regions Financial Corporation (NYSE:RF) has an Earnings ESP of +5.00% and carries a Zacks Rank #3. The company is scheduled to release results on Jul 19.

BB&T Corporation (NYSE:BBT) has an Earnings ESP of +1.54% and carries a Zacks Rank #3. It is scheduled to report results on Jul 21.

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