JPMorgan Surge Sends Warning to Portfolios With Big Bank Holdings

Equities surged last week to all-time highs. The NASDAQ led the advance, rising nearly 7% on the week. The rally broadened notably late in the week, and the Russell 2000 climbed more than 6%.

The trigger for the bullishness was growing confidence that the Strait of Hormuz would soon be reopened. These hopes culminated Friday with the announcement by Iran that it would allow traffic to transit this pivotal global chokepoint during the current ceasefire. However, it appears the devil is in the details as far normalizing traffic through this transit point and even the ceasefire now seems in jeopardy.

The other key event last week was that the first earnings season officially commenced. The major banks, like Goldman Sachs (GS) , Bank of America (BAC) , Wells Fargo & Company (WFC) , Morgan Stanley (MS) and JPMorgan Chase & Co. (JPM) kicked off first quarter earnings season last week. All in all, earnings results came in above expectations, even as Wells Fargo was a bit of an outlier, offering up mixed numbers.

JP Morgan and Goldman benefited from robust trading revenue growth, up 20% and 27% year over year, respectively. Dealmaking fees at Goldman leapt 48% from the same period a year ago to $2.8 billion. While results exceeded the consensus, it is hard to get excited about either stock due to valuation.

When I first started to invest in the markets in the 1980s, many pundits had a maxim that the time to buy bank stocks was when they got down close to one times book value. The time to start trimming that position was when bank shares approached two times book value. Now JPM is trading over 2.4 times tangible book value. And while Jamie Dimon has been a great leader and the bank has executed better than its peers for years, that seems a bridge too far as valuation. At least for me.

Investors hoping to get insight to how credit markets are performing, or at least the problem areas of the credit ecosystem, cannot glean much from last week’s major bank results, even as Morgan Stanley did have a big jump in credit provision losses. Lending changed drastically after the Great Financial Crisis. Regulations made holding riskier assets on banks’ balance sheets much more problematic.

This led to the huge growth in private credit market to lend to mid-market firms that can’t raise money directly from public markets. The mortgage markets are now primarily inhabited by the GSEs like FHA, VA, Fannie Mae and Freddie Mac. The major banks do supply warehouse finance facilities to non-deposit-taking financial institutions like private credit firms, or the so-called shadow banking system. Ironically this makes assessing the actual health of the credit markets less transparent.

In addition, the growing problems in commercial real estate are more likely to impact regional banks’ balance sheets as their loan books have more exposure to this trouble sector than the likes of Bank of America. That is why it is more instructive to sift through Q1 results of regional names like Bank OZK (OZK) when they hit later this month. Of note, Bank OZK’s Q4 numbers were adversely impacted as credit loss provisions rose 36% from the same period in 2024.

And those are my quick takes on the beginning of first quarter earnings season that was overshadowed by events in the Middle East.

At the time of publication, Jensen had no positions in any securities mentioned.