JPMorgan Chase (NYSE:JPM) hit a record high in September on investor optimism about renewed trade talks between the United States and China. Although the stock has declined since then amid a broader market sell-off, the record high was notable, considering that JPMorgan's closest banking peers haven't surpassed their prior peaks and in some cases remain well below their best levels of the past couple of years.

JPMorgan's standout stock move highlighted how the bank's massive size aligns its value with investor sentiment about the global economy. With $2.73 trillion in assets, JPMorgan is the biggest U.S. bank, and its operational footprint has a similarly grand scale.

Looking ahead, investors need to consider how a U.S.-China trade deal, Fed policy, recession fears will potentially affect JPMorgan's business. The bank's stock appears inexpensive based on common valuation metrics, and JPMorgan has solid fundamentals to sustain long-term growth.

How trade disputes and Fed policy affect JPMorgan Chase

The most pressing concern for JPMorgan and the broader market is the U.S.-China trade dispute. The bank stock's record high came within two weeks after the countries said they would resume talks in October. Trade negotiators later announced they would meet in Washington on Oct. 10-11.

Image source: JPMorgan Chase.

The positive effects of a trade deal will reduce pressure on the Federal Reserve to cut interest rates, as the central bank has done twice this year. Those rate cuts led JPMorgan to lower estimates for net interest income, a key source of bank earnings.

The futures market indicates that traders forecast that the Fed will cut interest rates for a third time this year when it meets in December, and then likely hold steady after that. But circumstances can change quickly.

As recently as March, the Fed had planned to be "patient" about its next move after hiking rates four times in 2018, when fiscal stimulus helped to spur growth. But when trade tensions mounted and stocks swooned, Fed Chairman Jerome Powell and other central bank officials signaled that rate cuts were more likely. That pushed banks and their investors to reassess their earnings estimates.

For JPMorgan, that meant cutting its 2019 guidance twice within a couple of months. During its Q2 conference call in July, the bank slashed its estimate for net interest income by $500 million to $57.5 billion for 2019. Later, at an investment conference on Sept. 10, the bank announced that it expected another $500 million decline to $57 billion by year's end.

Somewhat surprisingly, the most recent Fed move didn't prevent JPMorgan from hitting a record high three days later, and to trade in a narrow range since then. Investors seem to believe that JPMorgan's fundamental business strength will be able to outweigh the short-term effect of lower interest rates. 

While rate cuts lopped $1 billion from JPMorgan's projected net interest income for the year, it's much better for the bank to have a Fed that's willing to support the economy with stimulus measures to boost asset values, increase financing activity and possibly extend growth.

Why JPMorgan's still in good shape

Setting aside cyclical trends and short-term political concerns, investors need to consider JPMorgan's solid business performance and spending on technology that set the stage for future growth.

JPMorgan CEO Jamie Dimon for years has espoused the idea of a "fortress balance sheet" that describes the bank's sturdy financial foundation to withstand a recession. This year, the bank adjusted its initial capital plan to comply with a "stress test" overseen by the Fed, allowing it to increase its dividend by 13% and to boost its stock buyback program by 43% to $29.4 billion.

Shareholders should feel reassured that JPMorgan has adequate capital to weather an economic contraction even as the bank supports its share price and rewards investors with a steady dividend.

The bank's dividend yield is currently about 3% a year, a rate that looks sustainable under the bank's capital plan. JPMorgan has historically demonstrated its strong commitment to returning cash to investors.

In addition, the bank is looking to grow. JPMorgan is seeking to increase its customer base in several ways, including the first expansion of its branch network in some states in more than a decade. JPMorgan also plans to open another 400 locations in the next few years, reversing the steady paring of its branch network since 2013. 

That 8% expansion of its branch network from just over 5,000 at the end of last year will give JPMorgan's consumer banks a stronger presence in regions with higher population growth. The bank aims to expand its footprint to reach 93% of the U.S. population by 2022, up from 69% last year.

Bank branches are expensive to maintain, but they help to provide value-added services for small businesses and customers who have more complex banking needs. The company found that people who visit branches frequently have driven most of its deposit growth.

Finessing fintech 

Technology is also a key priority for JPMorgan, having learned from experience that underinvestment in innovation can be crippling. The bank plans to spend $11.5 billion on technology this year, an amount that even the best-financed fintech start-ups can't match.

Square (NYSE:SQ) and PayPal (NASDAQ:PYPL), two high-growth fintech companies that started in payments processing but are adding more banking services, spend a fraction of what JP Morgan wants to dedicate to technology. Square last year spent about $500 million on product development in 2018, and this year boosted that spending by about 50% during the first half. PayPal last year increased product development spending by 12% to $1.07 billion, and reported another 12% increase during the first half of 2019.

Some of those newcomers have replaced bank-like service for millions of tech-savvy early adopters. But JPMorgan has the financial resources that many smaller banks don't have to build out fintech capabilities that are a key competitive advantage.

To unify its branding, JPMorgan shut down its branchless banking service called Finn. Instead, it combined Finn with its Chase platform to offer services such as free monitoring of credit scores, loyalty rewards for discounts at stores that use JPMorgan merchant services and the ability to open an account from a smartphone.In addition, the bank created a wealth management platform called You Invest that gives customers low-cost trades, while its You Invest Portfolios have a robo-advisor that recommends weightings of investments for a low fee.

JPMorgan's technology spending also is going into artificial intelligence and cloud computing. These areas have a variety of applications for banking, including handling more complex tasks for customers that used to require human intervention.

For instance, in JPMorgan's consumer banking business, AI can improve key banking tasks like underwriting loans and approving borrowers quickly to let them start shopping for a home or car. The bank estimated that it's saving $150 million a year with machine learning applications that immediately sort legitimate point-of-sale transactions from potentially fraudulent ones.

In securities trading, the company's DeepX machine learning assists the company's trading algorithms while cutting down on costly errors. AI also powers virtual assistants that can answer questions and support internal help desks.

Keep an eye on JPMorgan Chase

JPMorgan will report its latest quarterly results on Oct. 15, giving investors a chance to hear more about management's outlook for the coming year, along with an initial look at how rate cuts in July and September affected its income. It's been 12 years since the Fed last started an easing cycle, and banks like JPMorgan are the first to feel the effects of changes in monetary policy. They also have a front-row seat on how rate cuts affect consumers, businesses, markets and the broader economy.

The consensus estimate indicates that JPMorgan's earnings will rise 4.7% to $2.45 per share, but the bank has surprised to the upside for the past two quarters. JPMorgan's valuation is slightly above the industry average, putting a premium on good results. However, in my view, JPMorgan merits a higher valuation for long-term holders with its stable balance sheet, expansion plans, and technological expertise. It'll be interesting to see whether the bank's results bear out that thesis later this month.

Rob Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends PayPal Holdings and Square. The Motley Fool has the following options: short October 2019 $97 calls on PayPal Holdings and short January 2020 $70 puts on Square. The Motley Fool has a disclosure policy.