JPMorgan Chase (NYSE:JPM) missed Wall Street forecasts by a hair on Friday, but the financial stock sold off sharply.
Apparently, investors aren’t interested in whether the Big Four banks that include JPMorgan, Bank of America (NYSE:BAC), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) are plodding along as expected. They’re more concerned about whether these banks are stuck on the same course — that is, steadily downward.
MarketWatch columnist and Wall Street Journal writer David Weidner summed it up well on Friday: If JPM is the best the financial sector has to offer, we’re in deep trouble.
Here are the specifics. JPM posted fourth-quarter earnings that dropped 23%, largely on declines from investment revenue. It suffered a 52% decline investment banking profits to $726 million as revenue fell 30%.
That was expected. JPMorgan CEO Jamie Dimon said last month his company figured investment banking revenue would take a hit in Q4. This isn’t just a JPM problem, but an industrywide trend. The Fiscal Times reported this in December:
“Only 96 of the 175 NYSE member firms reporting results indicated any kind of profit for the third quarter of this year; the number of unprofitable firms soared. Collectively, those member firms that do business with the public lost a stunning $1.92 billion in the third quarter, compared to profits of $2.1 billion in the second quarter and $4.7 billion in the third quarter of 2010.”
JPMorgan’s headline earnings of $3.73 billion, or 90 cents a share, matched numbers that analysts had already pushed downward due to gloomy forecasts. Yes, Q4 2010 earnings totaled $4.83 billion, or $1.12 a share — but experts weren’t surprised.
So why the sharp sell-off? And why are traders now forecasting doom and gloom for Citigroup, Wells Fargo, BofA and other blue-chip financials?
Well, a big reason is that memories of 2011 are likely too strong to forget. The financial sector was rebounding across the 2010 holidays and had some spring in its step to start 2011. BofA stock was at $15. Citigroup was above $45 (adjusted for that 1-for-10 split, of course). JPMorgan was near $45, too.
Then major financial stocks fell, on average, almost 30% across 2011 — even though earnings didn’t fall at the same clip. And in the cases, like JPMorgan, there were even signs of life amid the crash. JPM revenue stayed pretty flat, all things considered, and fiscal 2011 earnings were up 17% over 2010 full-year numbers. The company reinstated a respectable dividend that at current valuations yields about 2.7%.
But now in mid-January, BAC is under $7, Citi is $30 and JPM is $35. And that’s after a rip-roaring rally to start 2012! The recent declines have wiped out close to a third of this year’s gains.
Another big reason for the sell-off is that Wall Street just doesn’t trust the bottom lines of these banks. If investment banking revenue is drying up, what’s going to replace it? Regulations continue to limit bank profitability. A backlog of foreclosures and bad debt persists. The drumbeat of litigation related to robo-signings and other unpleasantries is endless. Where will growth come from?
Most folks think JPMorgan is the standard bearer for big financial stocks. It’s now larger than Bank of America by total assets. Jaime Dimon is considered the prima donna of financial CEOs. His bank quickly returned to profitability after the financial crisis and hasn’t posted a quarterly loss since the end of 2008.
But clearly there are reasons to worry about JPM – and reasons to worry that the recent run in banks is overdone. Consider that the Financial Select Sector SPDR ETF (NYSEARCA:XLF) is up over 17% since Thanksgiving even after today’s sell-off.
Sure, it may be just an overreaction. But history tells us the market has overreacted more to good news from the banks than to bad news. And it shouldn’t be a shock that investors are holding bank earnings to a higher standard to protect themselves from irrational exuberance.
It’s not so much that JPMorgan disappointed The Street, but that it hasn’t really shown anything that will change the prevailing negative opinions. That bodes poorly for the stock, not just after earnings but for the long term.
It also sets the bar pretty high for competitors this earnings season. If Bank of America, Citigroup and Wells Fargo don’t show real signs of strength, Wall Street will assuredly see that as clear signs of weakness.
In short: If you own bank stocks, look out below.
Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace??.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.