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JPMorgan Earnings Could Determine the Dow's Fate

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JPMorgan Chase (NYSE: JPM  ) is scheduled to release its quarterly earnings report tomorrow, and there's a lot riding on what the big bank says about its future. Although most analysts expect a sizable jump in income for the June quarter, the bigger question is whether JPMorgan can sustain its growth in the face of rising mortgage rates and other headwinds that could jeopardize some of its most lucrative sources of high-margin revenue. If the bank can't succeed in that mission, then the resulting fallout could have negative implications not only for JPMorgan and other banks, but for the entire Dow Jones Industrial Average (DJINDICES: ^DJI  ) .

With investors still getting over controversies like the "London Whale" scandal and Jamie Dimon's successful retention of his dual role of chairman and CEO, JPMorgan really needs to get past those distractions and get back to business. Let's take an early look at what's been happening with JPMorgan Chase over the past quarter and what we're likely to see in its quarterly report.

Stats on JPMorgan Chase

Analyst EPS Estimate


Change From Year-Ago EPS


Revenue Estimate

$24.84 billion

Change From Year-Ago Revenue


Earnings Beats in Past 4 Quarters


Source: Yahoo! Finance.

Can JPMorgan face the coming storm?
On the whole, analysts have been extremely optimistic about JPMorgan's earnings in recent months, boosting their June-quarter estimates by $0.07 per share and raising their full-year 2013 consensus by a full $0.25 per share. The stock has held near multiyear highs recently, having risen nearly 14% since early April.

One reason for the optimism about JPMorgan is that the bank has done exceedingly well in past quarters. Last quarter, net income rose 33% from the previous year's quarter to a record high, and the bank managed to keep mortgage originations high even as interest rates started to hit bottom and move higher. Improving returns on equity and capital ratios have also helped bolster the bank's situation.

But JPMorgan has had to deal with plenty of distractions during the quarter. A California lawsuit alleged that the bank once again used robo-signing tactics, this time to try to collect debt from credit card customers. Card giants Citigroup (NYSE: C  ) and American Express (NYSE: AXP  ) are likely to face similar charges, but the fact that the California attorney general chose to go after JPMorgan first suggests that the AG's office believes it has a better case against JPMorgan than its peers. In addition, although Jamie Dimon survived his vote of confidence, it nevertheless took attention away from the business of dealing with tough banking conditions.

Perhaps most importantly, the Fed's recent consideration of an exit from its quantitative-easing program will have big implications for JPMorgan. The stock plunged after the Fed's June meeting as markets interpreted the central bank's comments as paving the way for reductions in the Fed's $85 billion-per-month purchases of Treasury bonds and mortgage-backed securities. That drop caused even greater carnage in the bond market, as mortgage rates soared and now threaten to choke off not only refinancing activity but also new-home purchasing. Yet Fed Chairman Ben Bernanke's comments last night that he expects the central bank to remain "highly accommodative" could well signal that investors have been mistaken in believing that an end to bond-buying is imminent.

In JPMorgan's earnings report, watch closely for indications of where the bank believes it can pick up the slack from what will likely be dramatic declines in mortgage activity. Without some new source of revenue, JPMorgan's long recovery over the past four years might start to slow, and that could spell trouble for it and the rest of the banking sector.

JPMorgan has done well lately, but it's actually not the true standout bank in the industry. In a sea of mismanaged and dangerous peers, there's really only one financial giant that distinguishes itself as "The Only Big Bank Built to Last." You can uncover the top pick that Warren Buffett loves in The Motley Fool's new report. It's free, so click here to access it now.

Click here to add JPMorgan Chase to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

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9/29/2016 3:03 PM
^DJI $18170.84 Down -168.40 -0.92%
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American Express CAPS Rating: ****
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Citigroup CAPS Rating: ***
JPM $65.71 Down -1.00 -1.50%
JPMorgan Chase CAPS Rating: ****