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How will US bank earnings steer the tone of the Q2 earnings season?

jp morgan

The US Q2 earnings season kicks off this week with the major banks. Both JPMorgan Chase and Morgan Stanley will report their respective earnings results before the US market opens on Thursday 14 July. The share prices of these big US banks fell about 30% from their January highs on average due to a sharp decline in investment banking revenue. However, rising interest rates in the first half may provide some positives to the profit margins of lending businesses, which could still sustain overall revenue growth.

Higher interest income expected for JPMorgan on rising rates

Despite a bleak economic backdrop, big lenders indicate that the rising interest rate environment is likely to translate into higher loan income, with robust credit demand from borrowers. It is expected that banks with more income portion in lending, such as JPMorgan Chase and Citigroup may benefit from the rising rate environment. According to Nasdaq’s forecast, JPMorgan’s earnings per share for the second quarter will be at about $2.90, or a 30% decline year on year versus a 42% drop in the first quarter. The estimated revenue is at about $32 billion, or a 7% growth versus a 5% drop in the prior quarter. In general, JPMorgan, the largest US bank in terms of assets is expected to report a stronger performance result for the second quarter than it was in the first quarter.

Morgan Stanley could suffer from decline in investment banking revenue

By contrast, those banks that have a majority of business portion in investment banking may continue to suffer from the continuation of the decline in company deals. Hence, Morgan Stanley may face a further slowdown in both earnings and revenue due to a large investment banking business division that is adversely impacted by sluggish pipelines of company IPOs and acquisition deals. However, its other two major divisions; including wealth management and investment management, could offset some weaknesses inflicted by soft investment banking activities via the backdrop of strong trading activities in volatile market conditions. According to Zacks Investment, Morgan Stanley’s second-quarter earnings per share will be at $1.62, or a 14.3% decline year on year versus a 8.4% drop in the first quarter. Revenue is expected at $13.87 billion, or down 6% from a year ago, the same contraction pace as it was reported in the first quarter.

Major downtrend phase of JPM Morgan starts to show exhaustion signals

Source: CMC Markets as of 11 Jul 202 (Click to enlarg the chart)

Price actions of liquid tradable financial instruments such as equities do not move in a singular up or downward fashion but rather in cyclical waveforms where even persistent multi-month trending moves can be punctured by shorter-term multi-week countertrend movements as sentiments of market participants adjust to changing narratives from a mix of macro and firm-based fundamental factors.

Using integrated technical analysis, we can attempt to decipher whether a significant trending phase may have reached an exhaustion/inflection zone that increases the odds of a countertrend move next. The price actions of JP Morgan Chase (JPM) from its current all-time high of 172.95 printed on 25 October 2021 to its 5 July low of 109.30 (a decline of -36.8%) is classified as a major downtrend phase reinforced by bearish breakdowns below the 200-day moving average and the major ascending channel support from 19 March 2020 low.

The recent drop in price actions of JPM has reached a significant support zone of 110.48/105.85 defined by a confluence of elements; the graphical gapped-up support of 6 November/9 November 2020 and a cluster of Fibonacci extension levels. In conjunction, its downside momentum has also started to abate since 16 June 2022 as price actions have started to oscillate within a bullish reversal “Descending Wedge” configuration coupled with a bullish divergence signal seen in the daily RSI oscillator at its oversold region.

Watch the 105.85 key medium-term pivotal support and a break above 123.90 may see a countertrend rebound to retest the 133.80/143.90 resistance zone (200-day moving average & pull-back area of the former major ascending channel support from 19 March 2020 low). However, a break below 105.85 invalidates the countertrend rebound scenario for a continuation of the impulsive down move sequence of its major downtrend phase towards the next support at 90.80.  

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