- JPMorgan CEO Jamie Dimon’s stark warning in October 2022 about a steeper fall for the S&P 500 has yet to play out.
- We assessed that JPMorgan likely isn’t expecting a significant recession to occur in 2023.
- Therefore, JPM’s October lows are likely robust, as they should have reflected a mild-to-moderate recessionary valuation.
- A deeper pullback could offer investors a fantastic opportunity to add and ride the recovery in 2023.
JPM Outperformed the S&P 500 In 2022
Despite the recent pullback in the SPX post-December FOMC conference, JPM has held its recovery robustly while consolidating. While the price action is unconstructive, given its sharp recovery, JPM’s performance suggests that investors may be less concerned with a potentially significant downturn than what JPMorgan CEO Jamie Dimon warned previously.
Also, JPMorgan’s global equity strategists remain concerned about a further fall in equity markets in H1’23, as they articulated: “Risks that stock markets grappled with [in 2022] aren’t over.”
JPMorgan Likely Doesn’t Expect A Deep Recession In 2023
Yet, the bank’s Co-CEO of Consumer & Community Banking (CCB) Marianne Lake, is confident of its outlook in 2023, even though she emphasized that JPMorgan has taken down its estimates.
Lake accentuated at a recent conference that consumer spending remains strong, even though it’s expected to moderate. Moreover, she added that the bank didn’t see a need to tighten its underwriting standards significantly, despite some adjustments in auto and home lending. Notably, Lake articulated that the key macroeconomic variables that led the Fed to pursue its hawkish agenda in 2022 could be softening:
We’re supportive of moderating the pace of rate hikes looking forward, no longer need a shocking normal approach to monetary policy. We are seeing signs that inflation will moderate through [2023 and 2024], but remain meaningfully above target. And then I think the labor market is still super tight no matter how you measure it, obviously. But it does feel like we [are] past the peak of wage inflation. So a shallow and short-lived recession at the end of  again, with all of the caveats around that. (Goldman Sachs 2022 U.S. Financial Services Conference December)
Lake’s commentary is also in line with JPM’s interest rate strategists’ estimates, as they see the Fed pivoting earlier than expected. Accordingly, they prognosticate the 2Y Treasury yield to move down to 3.8% by the end of 2023 from the close of 4.43% in 2022. Therefore, we assessed that JPMorgan likely does not anticipate a significant recession (which could have seen their yield estimates down even further in line with Deutsche Bank’s (DB) forecasts).
Hence, Dimon’s key executives and strategists are likely not subscribing to the more downcast range in his recession commentary when he highlighted that we could have a “mild to hard recession.”
As such, we are confident that JPM’s October lows have likely contemplated our base case view of a mild-to-moderate recession. Consequently, a deeper pullback against its recovering momentum could proffer investors a fantastic opportunity to pull the buy trigger.
JPM: Valuations Have Normalized
JPM last traded at an NTM P/E of 10.5x, pretty close to its 10Y average of 11.5x. However, investors should not expect the bank to post a performance close to its FY21 adjusted EPS of $15.3.
With the economy slowing further, it’s more likely that we could see potentially lower loan demand for big-ticket items such as automobiles, impacting consumer discretionary spending further.
Also, the growth in the bank’s net interest margin (NIM) should also taper off as the Fed slows down its rate hikes. As such, investors should lower their expectations of JPMorgan’s NIM tailwinds, which have helped mitigate challenging EPS comps in 2022.
Furthermore, the company remains focused on investing to drive long-term profitability in 2023. Lake highlighted that the bank still expects its investments “will be higher year-on-year in 2023,” even though it expects to moderate the pace of its growth.
As such, analysts expect JPM to post an adjusted EPS growth of 9.2% in 2023, lower than its industry peers’ average of a 13.5% increase in 2023 (according to Refinitiv data). Hence, JPM’s earnings growth could underperform its peers in 2023.
As such, we think JPM’s current valuation has likely captured the near-term upside as reflected in the sharp recovery from its October lows. Investors waiting to get on board can consider waiting for a further pullback before pulling the buy trigger.
Rating: Hold (reiterated)
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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