NEWSLETTER
J.Morgan (JPM) stocks rose in early trading Monday after CEO Jamie Dimon released his annual letter to investors, which included a hint about succession plans at the country's largest bank and a stern warning about interest rates. in the largest economy in the world.
Investors are on high alert ahead of this week's March inflation report, which is expected to show a modest easing of pressures on headline and core prices. Federal Reserve officials have been preaching that markets need to be “patient” about interest rate cuts as the economy continues to outperform.
In fact, last week's jobs report showed a much larger-than-expected gain of 303,000 new jobs last month, with wage increases largely in line with Wall Street forecasts. This report was released alongside the Atlanta Federal Reserve's GDPNow forecasting tool, which boosted its current quarter growth rate to around 2.5%.
“Despite the troubling outlook, including last year's regional bank turmoil, the U.S. economy remains resilient, consumers continue to spend, and markets currently expect a soft landing,” Dimon wrote in his annual letter to shareholders. A soft landing for the economy would mean that inflation would be brought under control without triggering a recession.
JP Morgan is the world's fifth-largest bank, with a market value of around $572 billion and around $3.2 trillion in assets under its umbrella.
MICHEL EULER/POOL/AFP via Getty Images
However, the veteran JP Morgan CEO also noted that a good portion of the current growth rate is “driven by large amounts of government deficit spending and past stimulus.”
He added that the long-term costs associated with the transition to the green economy, supply chain restructuring and increased military spending “may lead to stiffer inflation and higher rates than markets expect.”
Dimon questions 'soft landing' consensus
“In addition, the ongoing wars in Ukraine and the Middle East continue to have the potential to disrupt energy and food markets, migration, and military and economic relations, in addition to their terrible human cost,” Dimon said. “These significant and somewhat unprecedented forces cause us to remain cautious.”
Related: Key inflation report may derail interest rate cuts
Dimon also noted that U.S. stocks remain at the high end of historical valuations, while corporate borrowing remains relatively cheap given high interest rates.
LSEG data pegs the current forward price/earnings multiple for the S&P 500, a key valuation metric, at around 20.5 times. This is clearly above the five-year average of around 18.9 times, but also well below the peak of 24.4 recorded in July 1999.
In terms of corporate earnings, analysts see the S&P 500's collective earnings rising 5% from a year ago to a stock-weighted total of $457.4 billion. That figure is expected to improve to about $494.1 billion for the three months ending in June.
With that in mind, and with the overall economy performing well, Dimon says markets “seem to be pricing in a 70% to 80% chance of a soft landing.”
But Dimon believes the chances of that outcome occurring are “much smaller.”
“The die may be cast… (Small) changes in interest rates today may have less impact on inflation in the future than many people believe,” Dimon said. “So we are prepared for a very wide range of interest rates, from 2% to 8%, or even higher.”
An outcome at either extreme of that forecast could range from continued outperformance to a recession that includes high inflation.
Related: Americans doubt the economy's surprising success; they shouldn't do it
“Economically, the worst scenario would be stagflation, which would not only bring higher interest rates but also higher credit losses, lower business volumes and more difficult markets,” Dimon warned.
New leadership was born at JP Morgan
Dimon's letter was accompanied by an update from the bank, which included a note that the board is “spending significant time developing operating committee members who are well known to shareholders as strong potential CEO candidates.”
The current chief operating officer, Daniel Pinto, 56, was listed as “a key executive who is immediately ready to fulfill the CEO's responsibilities” should the need arise. Also in the frame: JP Morgan commercial and investment bank co-CEOs Troy Rohrbaugh and Jennifer Piepszak.
Dimon, 68, who has led the largest U.S. bank since 2006, underwent emergency heart surgery in 2020. He has also been linked to senior positions in the government, as well as as a candidate for the US presidency, for the last five years.
More economic analysis:
- Bond markets tell a story about Fed rates that stocks still ignore
- February inflation surprises with a modest rebound, but underlying pressures ease
- Vanguard reveals bold interest rate forecast ahead of Fed meeting
JP Morgan is scheduled to report first-quarter results before the market opens on Friday. Analysts expect the financial services giant to post a profit of $4.17 per share, down 3.6% from a year earlier, on revenue of about $42 billion.
JPMorgan shares rose 0.6% in early trading Monday to change hands at $198.59 each, extending the stock's year-to-date gain to about 15.4%.
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