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JP Morgan Stock Is Hurtling Toward a Reality Check in Q3

With lowered borrowing costs but no borrowers, management must weave a great tale if JPM stock is to escape unscathed

For the most part, I envy JPMorgan Chase (NYSE:JPM) CEO Jamie Dimon. In my cynical view, he’s the real “leader” of the free world. Yet it’s times like these where I’m glad I’m just the average Joe. With a critical third quarter of 2019 earnings report coming up early next week, all eyes are on JPM stock.

JPM Stock: JP Morgan Is Hurtling Toward a Reality Check in Q3
Source: Bjorn Bakstad /

If you looked at JP Morgan stock without the proper context, you’d probably have confidence going into Q3. After all, the big bank produced solid results for the Q2 2019 report. Profit of $9.65 billion, or an earnings-per-share of $2.82 represented a record tally. Also, revenue of $29.57 billion came in 4% above the year-ago quarter and beat consensus expectations.

Following the JP Morgan earnings report for Q2, JPM stock eventually edged higher before collapsing in August. With the upcoming Q3 disclosure, though, I’m not sure if shares will get off so easily.

Now, on paper, JP Morgan stock has reasonable benchmarks to clear. For EPS, analysts are expecting the company to deliver $2.45. That’s near the lower end of the estimate spectrum, which ranges from $2.38 to $2.54. In the year-ago quarter, the bank produced EPS of $2.34.

On the revenue side, covering analysts predict JP Morgan to ring up $28.5 billion. Again, this is near the lower end of estimates, which ranges from $28 billion to $29.2 billion.

A few years ago, I think you could make the case that positive momentum would sustain JPM stock. But with the myriad changes in the global economy and our monetary policy, I simply lack optimism. Even if the bank beats expectations, the forward outlook is what truly matters.

Party Time Is Over for JPM Stock

My thesis for the upcoming JP Morgan earnings report is the same for peers Citigroup (NYSE:C), Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC). Because of the Federal Reserve’s aggressively dovish monetary policy, JP Morgan stock faces a profitability risk. In order to overcome this, JPM and the big banks must focus on growth.

But where will that growth come from? Will consumers save the day? Or will the answer come from real estate or small businesses? I don’t see many realistic pathways, which is why I’m currently bearish on JPM stock.

Recently, I wrote up an earnings preview for Citigroup. In it, I discussed the realities of the Fed driving down borrowing costs. Yes, the move incentivizes spending and investments because it simultaneously disincentivizes saving. However, organizations like JPM must make up for the profitability shortfall with increased volume for lending and other activities.

Theoretically, lower interest rates should boost home purchases. And in fairness, we do see home sales pick up in lesser populated and cheaper real estate markets. But in total, home sales have been very slow, even with a robust labor market and multi-year low interest rates.

While lower rates are always good for potential buyers, I doubt that a few ticks lower will spark a housing paradigm shift.

And here’s something that I didn’t mention in my Citigroup story. Some real estate markets have gotten out of control. For instance, many well-paid Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) employees live in their cars to save on rent.

At no point should well-educated programmers and engineers feel compelled to call a parking lot home. This signals to me that the real economy is stretched beyond belief, and no fiscal voodoo can fix it. That portends bad things for JPM stock.

Don’t Let Noise from JP Morgan Stock Distract You

Of course, a counter-risk exists in that the big bank could produce yet another stellar quarterly report. With many on Wall Street growing pessimistic, such unexpected news could skyrocket JPM stock.

But even if that were to happen, I wouldn’t chase shares. Instead, I’d focus on the fundamentals. We have six-figure salaried programmers living almost like vagrants. Additionally, headwinds like the U.S.-China trade war have imposed a measurably negative impact on consumer sentiment. If this latter situation worsens, then small businesses probably aren’t doing so well.

Thus, we’re in the classic dilemma of a person lost at sea. Although we’re surrounded by water, we can’t drink it. For JP Morgan stock, the banking community is offering almost unprecedented discounts. However, few are financially stable enough to take advantage.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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