JPMorgan Chase Is In Reversal But Don’t Chase It Higher

Key Points

• JPMorgan topped estimates on strong gains in investment income. 
• Signs of stress are showing up in the consumer data and may impact the broad economy later this year. 
• Cash flow is robust and capital returns are driving a reversal in the stock price. 

The price action in JPMorgan Chase & Company NYSE: JPM has been bullish all year. The prospect of higher interest rates, widening margins, and increased earnings have helped to drive the market. That action produced a solid, if unusual, Head & Shoulders Reversal Pattern that has now been confirmed.

The caveat for traders and investors is that post-release actin has increased stock significantly in premarket trading and opened a gap. That could result in additional momentum and higher prices but also suggests a pullback will come soon. In this scenario, investors and traders wanting to enter this market or add to positions are better served to wait. A pullback will come, and another entry point will reveal itself. 

JPMorgan Chase Has Blowout Quarter: Shares Surge 

JPMorgan was expected to report strength in Q2, but the results are blow-out in quality. The company reported $41.3 billion in net revenue for a gain of 34.5% versus last year. The gains are driven by solid results in all segments, led by a 13% increase in average loans, and outpaced the consensus figure by more than 1000 basis points.

The gains are due primarily to the increase in interest rates and should accelerate in the coming quarters. The Fed is expected to increase rates by at least 25 basis points, and the signs are good they’ll do another 50 by the end of the year. 

The question is if the consumer will remain resilient and there are signs of cracking. While average loans increased by 13%, deposits fell by 6%, and charge-offs rose. The company reported a net credit reserve build of $0.326 billion, including $1.4 billion in charge-offs.

Charge-offs are up roughly 100% YOY and suggest that tightening credit conditions hurt the economy, which is the intent. As for JPMorgan, the bank maintained a high 13.8% tier 1 capital ratio and improved its capital position. The company has more than $1.4 trillion in cash and securities available for use—good news for dividend and share repurchase plans. 

Regarding earnings, earnings were up strongly. The company reported a 67% increase in net income, including First Republic Bank's impact. Adjusted for that, net income is up 40% and well above the consensus estimate. The adjusted earnings, which include $0.91 in FRC income, beat the consensus by $0.61, and this strength can be expected to continue.

If anything, tightening credit conditions will cause more banks to fail, and JPMorgan will grow even larger when it bails them out. 

The Sell-Side Is Supporting JPM Price Action 

The analysts' activity has been mixed this year but is bullish on balance. Marketbeat didn’t pick up any new revisions immediately after the release, but upward price target revisions and upgrades are possible. Until then, the consensus sentiment is Moderate Buy, trending higher than last year’s Hold.

The consensus price target is about 5% above the post-release action, trending higher than last month, last quarter, and last year. As it is, the consensus target has the stock trading near $160 and within easy distance of a new all-time high. 

The chart is good. It shows a market in reversal following a bottom. The caveat is that the bottom formed within a trading range and may have already made most of the gains. Price action is above the mid-point of the range and may pull back to confirm support.

Support is likely at the $150 level; if confirmed, this market could increase to the $170 region.