This morning was the first big day in the Q2 2013 earnings season - with financial juggernauts JPMorgan (JPM) and Wells Fargo (WFC) reporting earnings. Heading into earnings, JPM has been performing in line with the overall market - up roughly 3 percent over the past month. And, like the broader market, JPM is near all-time highs.
This could be considered strong performance, considering that during this time the Federal Reserve and financial regulators also announced that banks would need stronger capital requirements. However, JPM is a best-of-breed bank with already strong capital positions, so perhaps it is not that surprising why they were able to shake off that news.
JPMorgan was expected to grow profits by double-digits year-over-year, with earnings per share expected at $1.44 per share, up 18 percent. Additionally, revenue was expected up 8 percent to $24.8 billion.
As for the equity reaction, options traders were pricing in below average moves for both JPMorgan post-earnings. Though averaging a 2.69 percent move following earnings announcements, options straddles were pricing in a move of just 2.3 percent - suggesting traders thought this report would be relatively uneventful.
JPMorgan's earnings per share actually came in at $1.60, growth of 31 percent year-over-year. Revenues gained 13 percent to $26 billion. At writing, the stronger-than-expected growth has not been able to sustain JPM above $55 per share - and the stock is trading down slightly from yesterday's close.
Perhaps traders are taking hold of JPMorgan's disappointing comments on interest rates. Net interest income dropped 4 percent year-over-year to $10.9 billion, compared with $11.2 billion estimates. Additionally, JPMorgan CEO, Jamie Dimon, noted that - though there are signs the U.S. economy is improving - loan growth has been soft.
The rate of mortgage originations has slowed, perhaps a result of the 1 percentage increase in 10-year yields over the past few months. Second quarter originations increased 12 percent to $49 billion, compared with a rate of increase of 39 percent in the first quarter.
Unsurprisingly, trading revenues were strong, particularly after Dimon noted last month that the bank's trading results were ahead of earlier estimates.
Next Quarter is Critical
My take: it's time for JPM longs to ring the register and sell some of their position. JPM has recently had a strong run-up with seemingly no notable pull-back. This year, the price has gained 25 percent, 12 percent of which came in the past three months. The strong upward trend, as noted on the chart above, remains intact so long as the price doesn't fall below $50 per share.
Ultimately, I expect JPMorgan to move to a valuation of 1.25 times book - a price that would put JPM around $65.
However, the next quarter is going to be critical for banking. As JPM's earnings today confirm, banks are not able to grow net interest margin as much as they have in recent quarters. Interest rates are unlikely to move lower, leaving a gap between higher long-term rates and low short-term rates. While I like JPM over the longer-term, I think that at these levels, it is best to stay away from the stock and look for chances to enter positions at lower levels.