Stocks have been soaring mostly on investor sentiment. That sentiment was partially based on the belief earnings would continue to rise quarter after quarter, year after year. Investors also believe the Fed has their back.  But what if the earnings thesis is not true?

The New York Times reports JPMorgan Earnings Fall 18.5% on Slowdown in Trading and Mortgage Lending

JPMorgan Chase reported an 18.5 percent slump in first-quarter earnings on Friday, as the nation’s largest bank grappled with dual challenges: sluggish revenue from trading and lackluster mortgage lending.

The bank’s stock dropped when the market opened on Friday morning, falling more than 4 percent.

Part of the slowdown came from a slowdown in revenue from fixed-income trading, which fell roughly 26 percent to $3.76 billion from $4.75 billion a year earlier. 

JPMorgan’s earnings also contained a number of bright spots, including an increase in average loan balances within the commercial banking business, along with an uptick in auto loans. Auto loans grew by 3 percent, to $6.7 billion from $6.5 billion a year earlier. Private banking was another rosy area for the bank, with revenue rising to $1.5 billion, up 4 percent from the same period last year. Credit card sales volume also grew, up 10 percent to $104.5 billion from the same period last year.

Still, the strength of those businesses could not completely offset the continued decline in trading revenue and mortgage refinancing, which had once been a particularly robust source of profit for JPMorgan and its rivals.

Now, the heady days of refinancing seem distant. Rising interest rates, coupled with an increase in housing prices, have damped homeowners’ appetite to refinance. Mortgage loan originations also dropped to $17 billion, down 68 percent from a year earlier, and 27 percent from the previous quarter. That helped push net income down by $559 million to $114 million for the first quarter.

Asked whether the fall in mortgage loan originations might prompt the bank to broaden its lending to a wider swath of people — even those with tarnished credit scores — Mr. Dimon said on Friday that “our credit standards are pretty consistent.” He added, “We feel pretty good about the risk that we are taking.”

The comment reflects a deep timidity among the banks, which have focused their lending almost exclusively on borrowers with good credit. In part, the banks are reluctant to take on risk and are skittish about exposing themselves to litigation related to any questionable mortgages.

The Financial Times reports JPMorgan Misses Targets as Fixed Income Hit

JPMorgan Chase had its worst start to the year in fixed income trading since the depths of the financial crisis, causing the largest US bank to report a sharp decline in profits.

Revenues from trading bonds, currencies and commodities fell 21 per cent in the first quarter to $3.8bn, compared with the same period in 2013.

The first quarter is traditionally strong and the weak result – the worst since the start of 2008 – reverberated across Wall Street ahead of next week’s results at Citigroup, Bank of America, Morgan Stanley and Goldman Sachs.

Earnings per share fell to $1.28 from $1.59 a year ago compared with analysts’ forecasts of $1.38 a share.

JPMorgan had already warned in February that trading revenue was weak, but had then pointed to a 15 per cent decline. Other banks also issued gloomier updates from their trading floors. Overall markets revenue was down 17 per cent at $5.1bn with a smaller decline in equity trading.

Missing Ratcheted Down Expectations

It’s rare for companies to miss expectations because of all the revised forward guidance. Typically companies guide to estimates they can beat by a penny.

That JPMorgan failed to do so, means that conditions deteriorated more than expected.

In this case, slowdown in fixed income and mortgages were way off the revised mark, and even further off the original estimates.

Bright Spots About to Dim

Supposedly autos are a bright spot. But are auto loans going to rise forever?

I think not. Rather, I suggest the demand for autos will soon peak if it hasn’t already.

But it’s that slowdown in housing that’s going to be the real killer. A housing slowdown means a slowdown in other durable goods.

Looking ahead, a slowdown in durable goods, especially cars portends a decline in manufacturing hours or employment.

This is precisely what’s wrong with taking a single indicator and projecting it forever into the future for “years to come” as economist Robert Shiller did recently with manufacturing hours.

For discussion, please see

Start of Mean Reversion in Earnings?

Those projecting future earnings explosion also play with fire. And if earnings expectation don’t pan out (I suggest they won’t), stocks are priced not for perfection, but well beyond perfection.

Mike “Mish” Shedlock