• February 1, 2023

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Topline

JPMorgan, the nation’s largest bank, kicked off second-quarter earnings season on Thursday with worse-than-expected results spurred by the market’s deteriorating conditions, prompting the firm’s billionaire CEO, Jamie Dimon, to warn the fate of the economy largely depends on how quickly the Federal Reserve raises interest rates, which eat at company earnings, to combat rising inflation.

Key Facts

JPMorgan shares fell as much as 5% after the firm reported a second-quarter profit of $8.6 billion, or $2.76 per share—down 28% from last year and falling short of expectations calling for earnings of $2.88 per share, as a result of a $428 million credit to protect against bad loans, a drop in investment banking fees and lower income from card spending.

In a statement, Dimon acknowledged the global economy is dealing with “conflicting factors” including high inflation, waning consumer confidence and “never-before-seen” quantitative tightening that will likely have “negative consequences sometime down the road,” and announced the bank would suspend share buybacks to shore up cash during the uncertainty.

In a post-earnings call Dimon wasn’t ready to predict a recession over the next year, saying instead that a range of possibilities—including both a soft landing or outright recession—depend on how much interest rates, which tend to slow economic growth by making borrowing more expensive, go up and whether the war in Ukraine escalates.

Dimon was also somewhat optimistic, saying consumers are in “far better shape” than they were before the Great Recession, with less debt, “plentiful” jobs and more income, and are already spending less to help protect themselves against a downturn.

JPMorgan wasn’t alone in reporting a shortfall Thursday morning: Morgan Stanley reported income of $1.39 per share, below analyst expectations averaging $1.57, as investment banking revenue collapsed 55%; shares are down 3%.

In a morning note, analyst Tom Essaye of the Sevens Report said investors are “desperately” trying to determine when the Fed will stop hiking rates, which will be crucial to predict earnings in the coming quarters, and warned stocks have more room to fall until there is clarity.

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Crucial Quote

“We have not even seen hardly any of the impact of the slowdown on earnings, and we haven’t even begun to materially see the economic impact of Fed rate hikes on the broader economy,” says Essaye.

What To Watch For

Earnings season is just getting started. Citigroup, Wells Fargo and BlackRock report Friday, and Goldman Sachs and Bank of America are slated for Monday.

Key Background

Stocks have struggled in recent months as Fed officials work to combat the worst inflationary surge in 40 years by unwinding the central bank’s pandemic-era stimulus measures. After rising 27% in 2021, the benchmark S&P 500 has tumbled 22% this year and is officially in a bear market. To make matters worse, the U.S. economy posted its worst showing since the Covid-induced recession in the first quarter, shrinking 1.6% despite expectations originally calling for 1% growth. Now, experts are trying to determine how soon the economy could plunge into recession—or whether it’s already in one.

Further Reading

Dow Plunges 500 Points After ‘Underwhelming’ JPMorgan, Morgan Stanley Earnings As Investors Fear Even Bigger Rate Hikes (Forbes)

US Will Fall Into Recession This Year As ‘Worrisome’ Forces Grow, Bank Of America Warns (Forbes)

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