JPMorgan Missed and Rose, Goldman Beat by Four Dollars a Share, and Both Tell the Same Story

The large banks opened the third quarter reporting season on October 13. JPMorgan earned $5.57 a share against the $5.90 expected, and the shares went up about 1%. Goldman Sachs earned $17.01 against an expected $13.02, and the shares went up around 4%.

A four dollar beat and a thirty three cent miss produced almost the same share price reaction. That is worth a moment, because it tells you the market was not reading the earnings line at all.

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What was actually in the numbers

JPMorgan's net income was $15.3 billion, up 6% on the year, on revenue of $50.2 billion, up 8%. The miss came from $658 million of pretax losses on investment securities; excluding those, earnings were $5.75 a share. That is a mark to market loss on a bond portfolio in a quarter when the ten year Treasury went above 5.3% and the thirty year above 5.7%, which is to say it is the rate environment passing through the accounts rather than anything about the lending business.

Goldman's quarter was made by one line. Equities revenue was $6.44 billion, up 72% on the year. Fixed income, currencies and commodities was $3.47 billion, down 1%. Net profit was $5.29 billion against $4.10 billion a year earlier.

A 72% increase in equities trading revenue is not a sign of a healthy business so much as a sign of a volatile market. Trading desks earn more when prices move and clients reposition, and this quarter supplied both: a first rate increase since 2023, a long bond at a twenty four year high, and an equity index setting records through all of it.

Why the reactions were so similar

Whitmore's Watchlist:
> GS (The Goldman Sachs Group, Inc.): The most trading dependent of the large banks, and the clearest read on this quarter's volatility.
> MS (Morgan Stanley): The closest comparison, with a larger wealth management business to balance it.
> C (Citigroup Inc.): The most restructuring dependent of the four, where the story is costs rather than markets.

Investors largely looked past both results because they had already decided what this reporting season is about, and it is not the third quarter.

It is about two forward looking questions. The first is whether the trading and investment banking strength repeats, and the answer from both companies has been that some of it reflected conditions that were exceptional. A bank trading on a multiple of earnings that include a record trading quarter is more expensive than the multiple suggests, and the comparison a year from now becomes punishing.

The second is credit. Provisions and charge off guidance are management's forecast of the economy stated in dollars, and the September employment report, with 29,000 jobs added and unemployment at 4.2%, is the first data point in a while that argues against the benign description the banks have been using. Card and auto losses follow the labour market with a lag of a few quarters, so nothing in this quarter's numbers would show it yet.

There was a third signal in the day that had nothing to do with banks. Chip stocks fell after reports that a Chinese memory maker had made progress on a new architecture, with Micron down more than 5%, and the broad index closed slightly lower despite the bank results. When financials beat and the index still falls on a semiconductor headline, the market's direction is being set somewhere other than the earnings it is nominally reporting.

How to read the rest of the season

The useful comparison across the four large banks is which of the three carried each result. A bank whose beat came from trading has had a good quarter and an unrepeatable one. A bank whose beat came from net interest income with flat provisions has had a better quarter than the headline says.

Buybacks are the quiet tell underneath all of it. A bank returning less capital than last year is telling you something about its own view of the capital it may need, and that statement is more candid than anything in the prepared remarks.

Whitmore's Take: A four dollar beat and a small miss moving the same way means the market is pricing next year's credit costs, not this quarter's profits. Worth reading the provision line and the buyback pace before the earnings number.

Disclaimer
The content in this email does not constitute an offer or solicitation to buy or sell any financial instrument. All commentary is general in nature and is not directed at any individual investor.

Written by Daniel Whitmore
Millionaire Insiders