Why JPMorgan Chase Will Move the Dow Tomorrow

On Thursday, the Dow Jones Industrials (DJINDICES: ^DJI  ) plunged after biotech stocks and other former leading sectors reversed course, wreaking havoc on the broader market. But even though high-flying speculative stocks have gotten the bulk of investors' attention lately, that should begin to change as earnings season starts to ramp up. JPMorgan Chase (NYSE: JPM  ) has the honor of being the first Dow stock to report March-quarter earnings. Given the influence that it and fellow Dow component Goldman Sachs (NYSE: GS  ) have, not just within the Dow Jones Industrials, but as a barometer of the financial sector generally, how JPMorgan Chase performs could have big implications for the Dow's future movements.

JPMorgan Chase plans to issue its earnings release at 7 a.m. EDT Friday morning. The bank will follow that up with a conference call to review the results at 8:30 a.m. EDT.

Currently, investors expect JPMorgan Chase earnings to fall from year-ago levels, with year-over-year revenue also dropping substantially. JPMorgan already warned investors at the bank's investor day a couple of months ago that it was seeing slower activity in its client-trading area. Also, even though interest rates have dropped somewhat from where they began the year, the drop hasn't been substantial enough to reverse the downward trend in mortgage activity. Those headwinds could pressure JPMorgan's results substantially.

But, like Goldman Sachs, JPMorgan Chase might well be able to use its broader investment-banking business to bolster its overall results. Recently, pick-ups in merger and acquisition activity, as well as initial public offerings, have helped investment banks, and JPMorgan Chase topped Goldman Sachs and its other rivals in bringing on almost $3.9 billion in fees from that niche last year. Moreover, with the Federal Reserve giving JPMorgan Chase a clean bill of health in its latest stress tests, the door is open for investors to get a massive return of capital during he next year, including both extensive share buybacks and a healthy dividend increase.

Source: Flickr / Steve Jurvetson.

One thing to watch tomorrow will be how JPMorgan Chase and CEO Jamie Dimon respond to the latest initiatives from regulators to require big banks to set aside more capital reserves. Estimates put the total amount that JPMorgan, Goldman Sachs, and six other big bank holding companies will have to add to their reserves at about $68 billion, as U.S. regulators adopt a 5% capital-to-assets ratio rather than Basel III's 3% ratio that applies to smaller banks. Although the limits might make JPMorgan Chase and other banks less likely to experience another financial-crisis meltdown, it will also limit their growth.

JPMorgan Chase will move the Dow tomorrow, not just because of its own particular read on the financial industry, but also because it's a key barometer of overall economic performance. If JPMorgan Chase can overcome the increasing number of obstacles it faces and find ways to grow, it could help push the Dow Jones Industrials to new heights in the days to come.

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