Can Q2 earnings boost JPMorgan’s share price?

Like many big US banks, JPMorgan’s [JPM] share price has had a tough first half of 2020, losing a chunk of its value due to coronavirus. From peak at the start of the year to trough in late March, JPMorgan’s share price dropped 43.6% of its value and has struggled to recover since.

JPMorgan’s share price is just ahead of the S&P 500, climbing 3.3% from the start of the month to close on 10 July, while the US benchmark index gained by 2.7%. Its share price was $96.27 at close on 10 July.

With a recession looming, it is not surprising that trader and investors are cautious about JPMorgan’s share price. But could Q2 figures, due tomorrow (14/7), give cause for optimism?

What does history show?

An increase in loan defaults is expected to have an impact on profitability for many banks in the second half. There will be many companies struggling to pay back borrowed loans amid persistent uncertainty, which will directly hit banks such as JPMorgan’s share price.

Additionally, less demand for M&As and IPOs is expected to hit banks’ margins.

It’s not all bad news, however, as US banks are also seeing a boost in trading activity as a result of a volatile market. JPMorgan’s volatility traders, for example, are thought to have raked in $700m through June, according to Business Insider — triple what they brought in 2019.

Analysts expect that JPMorgan will see a sequential increase in earnings in Q2 with an EPS of $1.08, according to data by FactSet and reported by MarketWatch. This is in stark contrast to a bank like Wells Fargo, which is expected to report an earnings loss of $0.05.

JPMorgan’s trading division provided some good news for the bank after posting a 32% increase in revenue to $7.2bn — a record according to CNBC.

However, JPMorgan was hit hard in Q1, when it posted a first-quarter profit well below analyst expectations. Profit came in at $2.87bn — 69% lower than the previous year. This was largely driven by a $6.8bn addition to the bank’s credit reserves, which meant a $8.3bn credit loss for the quarter, according to CNBC.

Meanwhile, quarterly earnings per share arrived at $0.78, compared to the $1.84, based on Refinitiv data.

While many expect similar results for Q2, there is some optimism in JPMorgan’s outlook. It is expected to post slightly lower reserves for loan losses in Q2 ($8.1bn according to FactSet) on top of its expected increase in EPS.

Analyst outlook

Jon Curran, senior bank analyst and portfolio manager at Aberdeen Standard Investments, told MarketWatch that “capital levels are good and sturdy for the large US banks”, when compared to the 2008 financial crisis.

Two factors helping to offset the US banks’ rising credit costs are “a surge in investment-grade bond offerings” as well as fees from increased mortgage lending, Curran said.

More than half (52%) of analysts see JPMorgan as a buy and 44% have a neutral rating on the share price, according to FactSet and MarketWatch.

David Konrad, senior analyst at D.A. Davidson, upgraded his rating for JPMorgan to a buy on 9 July, MarketWatch reported. In a note to clients, he highlighted the share price is “cheaper than peer valuation”, underpinned by a strong bond market and “increased risk appetite from investors leading to opportunities in [fixed income trading] and equity derivatives”.

With a P/E ratio of 10.82 traders and investors interested in JPMorgan’s share price may see this as an attractive entry point into the stock, especially if the bank’s outlook is positive when reporting Q2 earnings.