JPMorgan's Earnings Will Move the Dow Tomorrow

JPMorgan Chase (JPM +0.23%) will release its quarterly report tomorrow morning, and even though the bank's stock has climbed to new heights recently, investors are preparing for expected drops in earnings and revenue from year-ago levels. Given the importance of JPMorgan and the rest of the financial sector to the Dow Jones Industrials (^DJI +1.79%), and given JPMorgan's new place as the first Dow component to report in the new year, what the bank says in the morning could determine the index's course not just tomorrow but throughout 2014.

JPMorgan had a very strong 2013, with its stock making considerable headway despite the bank being constantly in the headlines as it dealt with litigation and other costly investigations. But the question JPMorgan faces is whether the banking industry really has any further to run, or whether the big gains that it and Wells Fargo (WFC +0.26%), Bank of America (BAC +0.78%), and other institutions have earned since 2009 have run their course. 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 report.

Stats on JPMorgan Chase

Source: Yahoo! Finance.

What's next for JPMorgan earnings?
In recent months, analysts have had mixed views on JPMorgan earnings, raising their fourth-quarter estimates by a nickel per share but cutting full-year 2014 projections by $0.02 per share. The stock has kept performing well, climbing 16% since early October.

JPMorgan has proven to be one of the most resilient stocks in the market, surviving blow after blow. The company's third-quarter earnings provided yet another example of this strength, as the stock rose even after suffering its first quarterly loss in almost a decade, with $7.2 billion in after-tax legal expenses including litigation reserves. Declining revenue of about $2 billion came largely from falling mortgage-product sales, while proprietary trading also weighed on the bank's results.

What has continued to make JPMorgan attractive is its rock-bottom valuation. Despite all the one-time settlement expenses that the bank has paid, JPMorgan still has a forward earnings multiple of less than 10. That makes it look cheap even by current banking-industry standards, with a valuation less than Wells Fargo and Bank of America. With so many stocks in other industries fetching closer to 20 times trailing earnings thanks to the market's overall run-up, JPMorgan appeals to value investors even with some concerns about future growth prospects.

Meanwhile, risk managers continue to check off potential liabilities from their lists, with the resolution of allegations connected to Ponzi-scheme artist Bernie Madoff marking yet another potential bullet that JPMorgan has dodged. As large as the $23 billion in litigation reserves available might seem, JPMorgan has earned $17 billion over the past 12 months, leaving plenty of room for additional expenses while still maintaining its long-term profitability. Bank of America has also seen substantial expenses from litigation, even as Wells Fargo has avoided most of the brunt of such costs.

In assessing JPMorgan's earnings report tomorrow, bear in mind that the bank's systemic risk has always had the largest potential impact on the Dow and the rest of the stock market. As long as its balance sheet remains healthy, ongoing settlement costs aren't likely to create lasting problems for the bank, minimizing its effect on the Dow going forward.

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