JP Morgan’s stock performance in the past month may have frustrated investors.
Despite a buying spree adding to bumper earnings and the promise of tighter monetary policy, JP Morgan’s stock price has fallen as analysts hold off on the investment banking sector.
The company is among the world’s biggest global banking institutions, competing with the likes of Goldman Sachs and Bank of America. The US lender, with $3.8bn of total assets, specialises in investment, business and consumer banking.
Yet what factors are shaping the JPM stock forecast going into 2022?
JP Morgan stock analysis: Cyclical downturn
JP Morgan’s stock news has been surprisingly gloomy of late, with the stock resting at the bottom of its 50-day range.
The share price declined 4.49% over the last month, and is down considerably from the company’s peak of $171.78 on 22 October. Market cap currently sits at $466.75bn, indicating more than $40bn losses in value since the company’s peak in October.
Most recently JP Morgan broke a four-day streak of declines with a gain of 0.77% by close on 14 December, before falling again 0.75% on 15 December and slumping 2.90% two days later.
Looking across the wider market, the JP Morgan stock price appears to be part of a collective cyclical downturn in investor sentiment following a strong earnings season.
Other big lenders such as Morgan Stanley (MS) and Bank of America (BAC) have enjoyed stronger year-to-date performances – 43.34% and 44.87% respectively – than JP Morgan’s 24.29% increase. Yet all have seen declines over the last month.
The bank’s bumper 2021 growth, on the back of high activity in mergers and acquisitions (M&A), contributed to a three-year dividend yield of 76.47%.
Dividend yield announced in December of $1.00 has accordingly helped investors return a sizable profit from their holdings, adding to the $3.70 dividend for 2021 that outpaced competitor finance companies’ dividend of $1.39.
Could M&A activity drive further growth?
Despite the recent stock declines, the wider macroeconomic and internal factors remain positive.
Investing uncertainty that defined the beginning of 2020 has been left firmly in the rear-view mirror, supercharged by bullishness among firms and investors, which has resulted in record numbers of global mergers and acquisitions (M&A).
Deal making has picked up where it left off in the fourth quarter of 2020. A Mergermarket report shows a deal value of $4.2trn in the first three quarters of 2021, culminating from nearly 19,000 global deals. It marks the fourth quarter in a row where deal value has exceeded £1trn.
JP Morgan has solidified its place near the top of the pile of advisors for these deals, with the advisory value increasing by 342.3% to $820bn in the first half of 2021, compared with the shutdown-inhibiting first half of 2020.
Meanwhile, the banking giant topped the private equity advisory table with a value of $106bn. The latest JP Morgan earnings report showed a 191.9% increase in deals advised from a year ago, ranking the second highest in the US.
The surge in deal-making activities, both in terms of M&A and initial public offerings (IPO), drove global investment banking fees up by 52% year on year.
Corporate and investment banking revenue increased from 38% to 39% as a share of JP Morgan’s four main business areas, while consumer and community banking fell from a 43% share to 39%.
Contractionary monetary policy
One of the few black spots in JP Morgan’s data is its drop in interest income on its assets. The bank’s net interest margins fell 11% year on year, feeling the bite of expansionary monetary policy carried over from the beginning of the pandemic.
Those conditions are quickly changing. The United States is intending to add interest rate hikes to a doubling down on its policy of tapering economy-boosting bond purchases, as inflation surged by 6.8% in November. An outlook published on 14 December by Fitch Ratings reinforces expectations that monetary policy will tighten in 2022.
That could induce increased deposits and help offset interest rate losses, while driving more revenue into the bank’s traditionally strong consumer and community department.
A return to contractionary policies, such as tapering and rate hikes, could help JP Morgan’s profitability, as would a strengthening dollar in the instance of rising rates.
For now, investors appear sage about the possibility of further interest rate increases, and modest tightening of rates over the next couple of years is not expected to dampen that outlook, according to PwC.
Deep dive into the latest results
Most of JP Morgan’s fundamentals look strong in each sector of business, reflected in company-wide third-quarter revenue of $29.6bn, up 1.34% from a year ago, underscored by assets under management of $3tn, up 17% from 2020 levels.
Net income came in at $11.7bn in the third quarter, a 24% increase from 2020, but a 2% contraction from the previous quarter.
The $2.1bn worth of reserve releases undoubtedly aided healthy returns, with the bounce in business and consumer spending enabling JP Morgan to return a significant amount of liquidity to its revenue, somewhat flattering its final figures. Reserves still sit more than $7bn above pre-Covid levels, likely to further boost future balance sheets.
In the community and business department, revenues were driven by consumer and business banking, up 8% year to date. Debit and credit card spend was up 26%, highlighting renewed bullishness as consumers continue to make use of pent-up demand.
But that has also dampened demand for the company’s loan offerings. Credit and debit card income fell 14%, despite the jump in spending.
The knock to interest margins represents the only metric from these releases, but could present a short-term problem.
JPMorgan stock forecast 2022
In the two-month period since earnings releases and the stock tumble, the outlook has remained positive, according to analyst opinions compiled by MarketBeat.
Over 2021, analysts providing JPM stock predictions had, on average, priced-in a 9.99% upside.
This has trended further upwards when excluding the first quarter, as a raft of data on record-breaking deals became apparent.
At the time of writing (17 December), the average price target for the stock for 12 months sits at $173.72, based on 19 analysts’ views, ranging from the high of $210 to the low of $125.
The stock has a consensus ‘buy’ recommendation, with 13 analysts rating JP Morgan stock as a ‘buy’, five recommending a ‘hold’ rating, and one analyst suggesting to ‘sell’ the stock.
Most recent JP Morgan share price forecasts show optimism, with UBS Group setting its price at $210, the highest outlook among other analysts.
Morgan Stanley boosted its outlook from $166.00 to $184.00. Robert W Baird was more measured, reiterating the price target at $165.
Some forecasts from mid-October, including Berenberg’s $125.00 target, indicate some concern on the macroeconomic forces that may affect the bank’s profitability, though the current correction is unlikely to be an indicator of falls to that extent.
The stock currently (17 December) has a consensus recommendation of ‘buy’, with 13 analysts rating it as a ‘buy’, five ‘hold’ and one ‘sell’, based on data compiled by MarketBeat.
Note that analysts often get their predictions wrong. You should always conduct your own research before making any investment or trading decision. And never invest money you cannot afford to lose.
According to data from MarketBeat, the average price target for the stock is $173.72, with a low estimate of $125 and a high estimate of $210.
Note that analysts often get their predictions wrong. You should always conduct your own research before making any investment or trading decision. And never invest money you cannot afford to lose. Also, be aware that past performance never guarantees future results.
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