Two days after President Donald Trump issued a 90-day pause on higher tariff rates for most countries except China, JPMorgan Chase (JPM 1.34%) CEO Jamie Dimon warned that the "economy is facing considerable turbulence," citing concerns of trade wars, persistent inflation, and fiscal deficits. In JPMorgan's first-quarter earnings call this morning, Dimon placed the odds of a recession at a 50-50 coin flip.
Yet despite his ongoing concerns about the economy and the administration's trade negotiations, Dimon said he's less concerned about a recession in the current climate and has other things on his mind during this economic cycle for one reason, in particular.
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Key Data Points
JPMorgan is well prepared for economic turbulence
If you were to block out all the noise and focus on JPMorgan's first-quarter earnings, one might simply see business as usual. The bank beat analyst estimates on earnings and revenue and actually slightly lifted its guidance for net interest income, one of the primary sources of revenue for most banks. Meanwhile, credit came in solid, with stable net charge-offs and lower nonperforming assets in the first quarter than the prior quarter. The bank built its credit reserves by about $1 billion, half the amount it did in the previous quarter.
Still, Dimon cautioned against reading too much into the backward-looking results and forecast. "We should have not given you that forecast. We don't know what the number's going to be. I would say it's a short-term number and based on what's happening today, there's a wide range of potential outcomes," he said. The guidance alludes to some things that are mechanical, like how loan losses flow through a bank. They don't just happen overnight. First, they are marked delinquent, and it can take months until they are actually ruled as a loss.
Dimon also said he expects analysts to eventually reduce their earnings forecasts for the broader benchmark S&P 500 (^GSPC +0.84%) and pencil in zero growth, down from an earlier projection of about 10%, which they have since lowered to 5% growth.
Dimon is not worried about JPMorgan navigating a recession, saying the bank has plenty of capital and liquidity to deal with whatever is thrown its way. He also noted the bank added $15 billion to its credit reserves in two months during the COVID-19 pandemic, only to release an equivalent amount of reserves several months later, partially due to the forward-looking way banks must now account and prepare for loan losses.
JPMorgan Chase also ended the first quarter with a 15.4% common equity tier 1 (CET1) capital ratio, which compares a bank's core capital to its risk-weighted assets such as loans. This is the capital banks lean on to cover unexpected loan losses. JPMorgan's ratio of 15.4% is 300 basis points higher than when the pandemic started, which equates to billions of dollars of additional capital.
The big concern is the future of trade
Dimon's main concern seemed to be the current state of the economy and what's going on with tariffs and a looming trade war. As of midday Friday, U.S. tariffs on China amount to 145%, while China said it would retaliate with total tariffs of 125%.
Obviously, if you look at our numbers, we have the margins and capability to get through just about anything.... But guys, this is different, OK? This is different. [It's about] safety and freedom for democracy. That is the most important thing. I really almost don't care fundamentally about what the economy does in the next two quarters. That isn't that important... the China issue is a major issue. I don't know how that's going to turn out. You know, we obviously have to follow the law of the land, but, you know, it's a significant change that we've never seen in our lives.
Dimon also touched about the potential impacts of JPMorgan's status as a global player and how embedded it is in other countries. "I do think some clients or some countries will feel differently about American banks," he said. However, Dimon was also hopeful that the Trump administration will be able to strike trade deals that will ultimately be good for the country and offer clarity in the coming months.
He also tried to clarify past comments from earlier this year about tariffs and how he believes in them from a national security perspective, using them to protect things like rare earth materials, medical ingredients such as penicillin, and semiconductors. But that's a small part of global trade overall.
Ultimately, I think Dimon has a similar view as most investors right now, who are still struggling to see the bigger picture once everything shakes out. With Trump pausing the wide-ranging package of tariffs he announced earlier this month and showing a willingness to negotiate, the worst-case scenario seems less likely. But what will global trade ultimately look like? How will other countries view the U.S. as a reliable trade partner following this recent series of events? And how will new trade agreements and whatever tariffs end up sticking impact the economy? It's a lot to digest in a short period of time.
