JPMorgan Chase, Wells Fargo Kick Off Earnings Season With Strong Q1 Results

Earnings season started with a bang early Friday as two major U.S. banks shared Q1 results and the market reacted positively. Big beats from JPMorgan Chase & Co JPM and Wells Fargo & Co WFC really help set a positive tone for earnings overall.

JPMorgan Chase earned $2.65 a share in the first quarter, easily beating third-party consensus estimates of $2.35. Revenue—which many analysts had expected to decline—rose 5% to $29.9 billion as the company appeared to benefit from higher interest rates and strength in consumer banking. Shares rose more than 2.5% in pre-market trading.

JPM’s Chairman and CEO Jamie Dimon, who swings a lot of influence around Wall Street, gave a sunny report on the U.S. economy in the earnings release, saying, “Even amid some global geopolitical uncertainty, the U.S. economy continues to grow, employment and wages are going up, inflation is moderate, financial markets are healthy and consumer and business confidence remains strong.” 

Sometimes we live too much in the moment. Let’s not forget that the Fed did raise rates back in December, and JPM was a beneficiary of that the first few weeks of the quarter. That might help explain why things don’t look as bad from a net-interest standpoint as some conceivably expected.

One thing that stood out in the earnings report—and could help paint a reassuring picture of the economy—was JPM’s credit card business, where sales volume rose 10% and merchant processing volume climbed 13%. This might work against concerns about consumer health after some less than impressive retail sales reports so far this year. The company said “consumer spending remains robust.”

On a less positive note, JPM reported lower equity and fixed income trading in Q1. This wasn’t unexpected, considering the relative lack of market volatility in early 2019. However, trading revenue didn’t come in as poorly as some analysts had expected, and that might raise expectations next week, particularly for Morgan Stanley MS but also for Goldman Sachs Group Inc GS.

Wells Fargo was the other big bank reporting early Friday, and its results also topped third-party consensus. Earnings per share of $1.20 beat the average estimate of $1.10, while revenue of $21.6 billion out-performed the average estimate of $20.99 billion. Shares climbed about 2% right after the company released results.

In its press release, WFC cited “strong credit performance and high levels of liquidity,” though revenue did fall year-over-year. Mortgage banking income rose sharply from Q4, and it could be interesting to hear any potential observations on the housing market from company executives if they address that in their call. WFC has a huge presence in the mortgage business.

There was also some merger and acquisition news in the Energy sector early Friday, as Chevron Corporation CVX said it plans to buy Anadarko Petroleum Corporation APC for $33 billion in cash and stock. There’s been a bit of an uptick in M&A activity recently, and this looks like a pretty big one.

Watch What We Say

Earnings season has began in kind of unusual circumstances. Typically, going into the first days of earnings, people tend to be on edge wondering what kind of numbers they’ll hear from the previous quarter. This time around, however, most market participants and analysts seem to already be expecting  relatively weak Q1 performance, and it’s all about what’s next. You don’t normally see this.

In other words, guidance and executive language could have a bigger impact than what the numbers say.  Judgment starts today with the bank earnings calls, and continues next week when four more key big banks report. Bank of America Corp BAC, Citigroup Inc C, Goldman Sachs and Morgan Stanley are all set to share their numbers by Wednesday. 

Going into earnings season, the market appears to have priced in things getting better later this year, but there’s an appetite out there to hear this from the executives themselves.

Arguably, not many executives have as big a bullhorn as Jamie Dimon of JP Morgan Chase, who presides over his company’s earnings call this morning. Dimon has the potential to conceivably move the market with his statements, and what he says might be more important than in many other quarters because many people want his view of where he sees the economy going.

It’s also kind of surprising that so far this year, we haven’t really heard CEOs speak up too much about the tariff situation. That’s something they might need to start addressing, and it could be worth listening for, especially from Financial firms but also from CEOs of Industrial, Materials and Info Tech companies whose businesses are potentially going to be affected by trade battles with China.

Another thing to consider is any perspective CEOS have on Europe’s soft economy and how that might play out for U.S. companies. If you look at the European Central Bank’s (ECB) statement from its meeting this week, it sounded pretty ugly. The Fed minutes, on the other hand, had a much more moderate “wait and see” kind of tone. 

Can’t Meet Low Expectations? Expect Ramifications

Though the emphasis might be on guidance and executive statements, also consider keeping something else in mind: Even though expectations are relatively low across most sectors, companies that can’t hit those low expectations might risk getting punched harder than usual. Companies that do meet the tepid expectations aren’t likely to get much reward. Companies that meet or exceed expectations and combine that with a positive forecast for the rest of 2019 are the ones that might stand to benefit the most.

For the record, FactSet pegs S&P 500 earnings to fall 4.2% in Q1, the first year-over-year quarterly earnings decline since Q2 2016.

While today marks the start of earnings season across all S&P 500 sectors, the earnings attention this time around is primarily likely to focus on Financials and Info Tech. There’s an old market saying that you can’t have a big rally without Financials, but so far this year that’s happened. Financials trail the S&P 500 (SPX) by quite a bit, though they are up moderately year-to-date. JPM’s trading numbers for Q1 are likely to get a close eye ahead of next week, when other investment banks report. Morgan Stanley has kind of taken the mantle on trading, so JPM’s numbers might help foreshadow what people expect for MS, especially on bond trading.

Info Tech, meanwhile, has been a leading sector all year, and earnings season means those companies will step to the plate and help set expectations for the coming months. There’s a lot of optimism in the sector, judging from its 23% gains year-to-date, so the question going into earnings might be whether that optimism was justified.

Market Malaise

Speaking of sector performance, the market seemed to remain in the same sort of malaise it’s been in for a couple weeks on Thursday as investors might have been squaring positions ahead of earnings. Volume stayed pretty low, as it has been for a while. 

The S&P 500 (SPX) had a very rare unchanged close, though it remains near recent highs just below 2890. There’s been no real concerted attempt this week to test 2900, a potential sign that investors might be waiting for earnings to be the catalyst that sends markets one way or the other.

Sector leaders on Thursday included Financials and Utilities, while laggards included Health Care—which got hit hard—along with Materials and Real Estate. Health Care has been among the weakest-performing sectors over the last three months, which some analysts say might reflect political pressure on the industry to lower prices. Health insurers were some of the sector’s worst performers Thursday.

Though earnings are today’s big story, some data are also on the plate. University of Michigan sentiment for early April is due shortly after the open, and the Briefing.com consensus is 97.6, down slightly from the last reading of 98.4 but still well above the January and February lows.

Key data due next week include March retail sales, March industrial production, and March housing starts and building permits.

Figure 1: A TALE OF TWO SECTORS: Since the start of the year, Health Care (candlestick) is the worst performing S&P 500 sector, hurt by worries about potential legislation designed to push down prices. Info Tech (purple line) is the leading sector year-to-date. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade.For illustrative purposes only. Past performance does not guarantee future results.

Key Data From China Next Week: There’s some important economic data winging its way across the Pacific next Tuesday. That’s the day China is scheduled to release its year-over-year Q1 gross domestic product (GDP) growth, a data point that’s come increasingly in focus for the U.S. market over the last few years as China’s huge economy exerts more influence on U.S. companies. In Q4, China’s GDP growth was 6.4%, while full-year 2018 GDP growth totaled 6.6%, the lowest in 28 years. For Q1, analyst consensus is around 6.3%, according to TradingEconomics, a company that monitors international economic data. 

Investors might want to consider keeping a close eye on the numbers under the headline, too, particularly industrial production for Q1. That number came in at 5.7% in Q4—above analyst expectations—while third-party consensus for Q1 industrial production growth stands at 5.8%. If that number comes in low, it could put another cloud over hopes for China’s economic resurgence. Some of the U.S. sectors with heavy exposure to China include Info Tech, Industrials, and Materials.

Speaking of GDP: Don’t get too excited, but Q1 U.S. gross domestic product (GDP) estimates are perking up a little. Last month, some analysts started looking for lower than 2% GDP growth in Q1, which would have been a pretty dramatic downturn from total 2018 growth of 2.9%. As of Thursday, the Fed’s GDPNow indicator projects 2.3% growth in Q1, which isn’t anything really outstanding but certainly sounds better than some of the earlier estimates that were out there. The estimate rose from the previous 2.1% due to recent manufacturing data, the Atlanta Fed said. The government’s first Q1 GDP estimate is due April 26.

Yields At Bay Despite Data: So far, this week’s somewhat higher than expected inflation data for March hasn’t apparently had much impact on Treasuries. Yields only moved a smidgen up the ladder early Thursday after the 0.6% rise in March producer prices, and the 10-year yield stayed just under 2.5%. That’s basically the level it’s pivoted around for a while, with some analysts seeing key technical resistance around 2.55%. Meanwhile, that inversion between three-month and 10-year yields that drew so much attention last month has stayed at bay so far in April, with the 10-year yield trading about six basis points above the three-month Thursday. The 10-year yield also has a comfortable 14-basis-point premium to the two-year yield, and those two didn’t invert in March, though they came close. Any soft economic data, whether from the U.S., Europe, or China, conceivably has the potential to put more pressure on the curve, which in turn might help re-ignite fears about the economy here.

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