U.S. stocks traded lower Tuesday despite investment bank JPMorgan Chase & Co. and mortgage lender Wells Fargo & Co. posting quarterly earnings that beat Wall Street forecasts. Analysts are keeping a close eye on bank earnings this quarter for any signs of softness in the economy. Economists fear the first quarter was weaker than expected.
"If the banks come in with downside surprises, that should cast a dark cloud over the rest of earnings season,” said Adam Sarhan, CEO of Sarhan Capital.
In morning trading, the Dow Jones Industrial Average, which measures the share prices of 30 large industrial companies, dropped 8.70 points, or 0.05 percent, at 17,968.34; the S&P 500 stock index dipped 3.65 points, or 0.17 percent, at 2,088.78. The Nasdaq composite lost 22.71 points, or 0.46 percent, at 4,964.67.
JPMorgan Chase’s Profit Jumps 12% in Q1, Helped By Rebound in Bond Trading
Shares of JPMorgan Chase & Co. (NYSE:JPM) gained nearly 2 percent Tuesday to $63.40 after the biggest U.S. bank by assets saw its quarterly profit gain 12 percent from a year go to nearly $6 billion after revenue from its fixed-income trading unit rebounded. The investment giant previously saw its fourth-quarter profit tumble 6.6 percent due to $1.1 billion in legal expenses.
JPMorgan's fiscal first-quarter net income rose 12 percent to 5.9 billion, or $1.45 per share, as revenue rose 4 percent to $24.84 billion, compared with a profit of $5.27 billion, or earnings per share of $1.28, on revenue of $23.86 billion a year ago.
Analysts polled by Thomson Reuters had expected earnings per share of $1.40 cents on revenue of $24.41 billion.
First-quarter results included a significant after-tax legal expense of $487 million. The quarter also benefited from $177 million in tax adjustments, compared to a tax charge of approximately $90 million in the prior year. Net revenue was $24.8 billion, up $967 million compared with the prior year, predominantly driven by strong performance in the company’s Corporate & Investment Bank unit, both in markets and investment banking.
Shares of JPMorgan have gained nearly 13 percent in the last year.
Wells Fargo Q1 Earnings Beat Street, But Profit Drops 3%
Shares of Wells Fargo & Co. (NYSE:WFC) dropped more than 1 percent to $53.89 Tuesday despite the fourth-largest U.S. bank beating Wall Street earnings expectations. The biggest mortgage lender saw its quarterly profit decline 3 percent from a year earlier as expenses rose, marking the bank's first profit drop in more than four years.
The San Francisco bank posted fiscal first-quarter net income applicable to common stock fell 3 percent to $5.46 billion, or $1.04 per share, as revenue rose 3 percent to $21.3 billion. That compares with a profit of $5.61 billion, or earnings per share of $1.05, on revenue of $20.6 billion a year earlier.
However, analysts had expected Wells Fargo to report net income of $5.15 billion, or earnings per share of 98 cents, on revenue of $21.24 billion.
Of the large banks, Wells Fargo has been more negatively affected than peers by low interest rates and shrinking net interest margins, according to Erik Oja, analyst at S&P Capital IQ. “The possibility of Fed rate increases appear to us to be a mirage in the hot desert, receding as U.S. economic data indicate softness in employment and manufacturing due to the strong dollar and cold winter weather,” Oja said in a research note Monday.
Wells Fargo grew loans held to maturity at an average annual rate of 3.3 percent in the last four years through the end of 2014, but their net interest income fell by an average annual rate of 0.7 percent, due to the company’s quarterly net interest margins falling to 3.04 percent in the fourth quarter of 2014, from 4.16 percent in the fourth quarter of 2010. “These declines are largely attributable to Wells Fargo's large pool of deposits, which await stronger loan growth,” Oja said.
Bank stocks historically under-perform the broader markets during the period that the Fed is raising rates, but out-perform afterwards, Oja said. “We see 2016 as a year of net interest income expansion, driven by higher loan yields,” Oja said.
Shares of Wells Fargo have gained more than 13 percent in the last 12 months.