JPMorgan Earnings: Profitability Remains Strong, but the Bank Sounds Alarm on Economic Turbulence

Key Morningstar Metrics for JPMorgan

• Fair Value Estimate: $195
• Morningstar Rating: ★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of JPMorgan’s Earnings

JPMorgan’s JPM profitability remains very strong as it reported first-quarter earnings of $5.07 per share, equating to a return on tangible equity of 21%. However, management sounded an alarm about the economy facing “considerable turbulence” primarily due to due to tariff-related disruptions.

Why it matters: The impact of tariff-related disruptions didn’t show up in the first quarter, except for slightly higher provisions. We think the impacts will be much more visible in the second quarter. The bank increased its allowance for loan losses by around $1 billion in the quarter.

• The bank’s first-quarter profitability was powered by solid net interest income, decent investment banking revenue, buoyant asset valuations helping asset management fees, and extremely strong principal transactions revenue due to increased market activity.
• We were skeptical about the rally in US bank stocks after the US presidential election, given the uncertainty around the administration’s policies and the healthy valuations in the sector. Bank stocks have corrected by more than 20% from their highs, and valuations look more appealing now.

The bottom line: We maintain our $195 per share fair value estimate for wide-moat-rated JPMorgan after incorporating first-quarter results and continue to believe that the shares are overvalued and there are better options for prospective investors on a risk-adjusted basis.

• JPMorgan has a fortress balance sheet and should hold up much better in a worst-case scenario. Our argument is that the strength of the bank’s franchise is more than implied in its current valuations, and the probability of significant upside surprises is relatively lower.

Long view: The bank can continue to enjoy elevated levels of profitability in near term, but we believe that the recent levels of super-high profitability are unlikely to be maintained in the long run. Investors should wait for a higher margin of safety given the significantly uncertain macro outlook.