JPMorgan Chase (JPM) delivered a boring but better-than-expected second quarter, and that should be more than enough to keep JPM stock outperforming the broader market by a wide margin for the remainder of the year.
After a boost from the earnings report, JPM stock was up nearly 10% for the year-to-date and within striking distance of a record high notched less than a month ago.
The market benchmark S&P 500, meanwhile, lags JPM stock by more than 7 percentage points for the year-to-date.
The latest earnings report bolsters the case for a JPM stock comeback after a dismal 2015 marked by hits from legal costs, loan-loss reserves, weak trading and even more regulatory woes.
JPM stock fell as much as 15% back in January, and it looked like it was set for a dud of a year.
That turned out to be a bad call. First-quarter results beat Wall Street forecasts for only the second time in the last seven quarters, and they did so in reassuring fashion, as all major business lines — most notably, trading — contributed to revenue and profits.
The Q1 report looked like a turning point for JPM stock this year, and the second-quarter report backs up that view.
With the most recent results, JPM has now topped Street estimates for two consecutive quarters. That’s something JPMorgan hasn’t managed to do since 2013, and should go a long way toward helping sentiment on JPM stock.
Don’t Diss JPM Cost Cuts
To be sure, JPMorgan earnings were hardly unblemished. Trading revenue — which reversed sharply last quarter after an ice age of sluggishness — went back to sleep. Revenue from mortgage banking likewise went into reverse.
Put it all together and total revenue slipped 3.2% to $24.53 billion, but that was still better than analysts’ average estimate. Indeed, the top line exceeded the Street forecast by more than a billion dollars, according to a survey by Thomson Reuters.
With that kind of performance, JPM needed to rein in costs to boost the bottom line, and that’s how it delivered a positive earnings surprise.
JPM has been shrinking itself to fit with the current state of the economy, and the restructuring efforts are starting to pay off. Indeed, non-interest expense fell 6%. Lower legal expense also helped.
Some observers might say that the JPM quarter wasn’t nearly as good as the headlines would suggest. An earnings beat on cost cuts isn’t the same as one driven by surprisingly strong earnings growth.
Yup. No argument there. But it misses the point.
For one thing, the market is happy to reward cost cutting. Additionally, in the case of JPM, it’s beginning to reap the advantages of all that costly restructuring, helping the case for better-than-expected profit growth going forward.
Besides, JPM has no choice. It can’t do anything about the soporific bond market, nor can it improve net interest margin when short-term interest rates hover around zero.
The current bonanza in mergers and acquisitions isn’t going to last forever, either. Worse, it sets JPM up for tough comparisons at some point in the future.
JPM has now delivered two consecutive quarters where it looks stable, reasonably well-run and primed for better growth ahead. That should be enough for JPM stock to keep grinding higher in the second half of the year.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
