Against arguably the most confusing economic backdrop in this country’s history, U.S. banking giant JPMorgan Chase (NYSE:JPM) is set to report second-quarter earnings in mid-July. The numbers likely won’t be very pretty. The earnings report will likely weigh on JPM stock.
But don’t fret this weakness. Instead, take advantage of it.
The core fundamentals underlying the U.S. economy will improve over the next six months. As they do, JPMorgan’s numbers will only get better. Ultimately, JPM stock will shake off near-term weakness, and finish the year above $100.
Here’s why.
Earnings Won’t Be Pretty for JPM Stock
The reality is that JPMorgan’s second-quarter earnings likely won’t be pretty.
Yes, economic activity improved meaningfully in the second quarter of 2020, particularly on the consumer spending front.
But, on a four-quarter GDP growth basis, the U.S. economy is still shrinking by nearly 7% year-over-year, marking the sharpest contraction on record. Meanwhile, retail sales in May — while up 18% versus April — still shrunk 6% year-over-year.
Plus, interest rates are at zero and U.S. Treasury yields are at all-time lows, two factors which inevitably weighed significantly on net interest income in the quarter (from which banks derive a huge chunk of their profits).
The one bright spot will be trading activity, as most signs point to a huge increase in retail trading activity over the past few months.
But that one bright spot won’t be enough to outweigh a deluge of negatives.
JPMorgan’s earnings report will likely be ugly. That ugly print could create weakness in JPM stock to levels below $90.
U.S. Economic Activity Will Continue to Recover
If JPM stock does dip below $90 on bad Q2 earnings, buy the dip.
Yes, the U.S. economy is in a rough spot right now. But things will only get better over the next six-plus months.
The reality is that, for the most part, U.S. consumers, businesses and legislators want things to get back to normal. This desire to normalize social and economic behavior must be balanced with the human costs of Covid-19. So, until a vaccine is approved and distributed, the U.S. will be walking this tight rope between keeping things normal and keeping people safe.
Admittedly, we probably rushed the reopening in May and June, which caused a spike in cases and now has many states pausing and/or reverting their reopening processes.
But we will get this second wave under control. Much like we did with the first wave. Once we do, we will get back to reopening things. Economic activity will perk up. And we will do a better job this time around of sustaining economic normalcy while limiting Covid-19 spread.
In other words, the U.S. is only going to get better at the Covid-19 balancing act over the next few months. As the country does, we will get the best of both worlds. Increased economic and social activity, and muted Covid-19 impacts.
Accordingly, the U.S. economy will improve into the end of the year.
As goes the economy, so go bank stocks, meaning that against the backdrop of improving economic activity in Q3 and Q4, JPM stock will head higher.
JPMorgan Stock to $100?
My numbers suggest that JPM stock will finish 2020 above $100.
The bank reported record-high 2019 earnings per share of $10.72. We all know fiscal 2020 earnings per share are going to get wiped out. But we also know that depressed 2020 earnings per share are not the new “normal”. That’s why it’s best to value JPM stock based on 2021 earnings potential.
At present, current consensus estimates on Wall Street call for 2021 earnings per share to come in around $8.50, which basically means the bank recovering 80% of its peak 2019 profits.
That seems entirely reasonable to me.
Historically, JPM stock usually trades at 12-times forward earnings. A 12-times multiple on $8.50 in 2021 earnings per share implies a 2020 price target for JPM stock of $102.
Meanwhile, if JPMorgan recaptures 95%+ of its earnings power by 2021 and nets $10+ in earnings per share, the same math implies a 2020 price target for JPM stock of $120+.
On that basis, I think JPM stock has a clear and visible runway to $100+ prices by the end of the year.
Bottom Line on JPM Stock
JPMorgan’s second-quarter earnings report won’t be the best.
Long-term investors shouldn’t worry about that.
The report is more representative of what has happened to the U.S. economy over the past three months, not what will happen to the economy over the next six months. What will happen over the next six months is that U.S. consumers, businesses and legislators will only get better at the Covid-19 balancing act, consumer behavior will increasingly normalize and economic activity will continue to improve.
As that happens, JPMorgan’s numbers will get better. And better. And better.
Against that backdrop, JPM stock should glide to levels above $100 by the end of the year.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.
