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Earnings Preview: JPMorgan Opens Quarterly Reports Amid US Economic Boom

Banks and financials are expected to be the second-biggest driver of S&P 500 earnings this quarter, according to Refinitiv estimates, with JPMorgan pacing sector gains.

JPMorgan  (JPM) - Get JP Morgan Chase & Co. Report could lead the country's biggest banks by releasing billions in bad loan reserves to boost its first quarter earnings this week, analysts suggest, a move that could cement the market's expectations of a post-pandemic rebound.

Wall Street banks will unofficially kick-off the first quarter earnings season Wednesday with updates from JPMorgan, Wells Fargo  (WFC) - Get Wells Fargo & Company Report and Goldman Sachs  (GS) - Get Goldman Sachs Group Inc. (The) Report. Bank of America  (BAC) - Get Bank of America Corporation Report and Citigroup C will follow on Thursday with Morgan Stanley  (MS) - Get Morgan Stanley Report rounding out the updates on Friday. 

Refinitiv estimates suggest collective S&P 500 earnings for the three months ending in March will rise 25% from last year to a share-weighted $338.7 billion, the best pace of growth in three years, paced by gains in consumer discretionary stocks and the financial sector, where cumulative profits are expected to top $66.3 billion.

JPMorgan, the country's biggest bank, is expected to post a huge increase in first quarter profits of $3.10 per share, according the Street consensus forecast, paired with a 5% rise in revenues that should top $30.5 billion.

BMO Capital Markets analysts expect JPMorgan's near-term outlook to focus on "the cadence of expected credit losses and whether the additional stimulus will reduce (or just delay) cumulative credit losses, capital management, including thoughts around M&A and share buybacks at JPM’s current valuation" as well as "the outlook for reserves releases and macro assumptions underpinning the reserve methodology."

Any move to release previous reserves set aside to cover bad loans during the worst of the coronavirus pandemic, however, could boost its bottom line and serve as a benchmark for rival banks looking to take advantage of what CEO Jaime Dimon said last week was an economic recovery could extend into a boom that lasts for another two years.

That view was echoed late Sunday by Federal Reserve Chairman Jerome Powell, who told CBS's 60 Minutes that "we're at a place where the economy’s about to start growing much more quickly and job creation coming in much more quickly.

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"This growth that we’re expecting in the second half of this year is going to be very strong. And job creation, I would expect to be very strong,” he added.

The six biggest U.S. banks set aside more than $117 billion in so-called loan loss reserves last year as the economy plunged by more than 33% over the second quarter -- the biggest on record -- and tens of millions of workers were sent home amid business closures and lockdown orders.

JPMorgan released around $2.9 billion of those reserves last quarter, however, a move that added 72 cents to its bottom line of $3.79 per share. BMO Capital Markets analysts expect the bank to release another $2 billion this quarter, with rivals Bank of America releasing $1.6 billion, Wells Fargo $1.5 billion and Citigroup $2.4 billion. 

More broadly, the Federal Reserve's decision to hold its benchmark lending rate unchanged, effectively anchoring short-term bonds yields at near record lows, while indicting a tolerance for inflation that has lifted longer-term yields to multi-year highs, gives banks some of the best financial conditions under which they operate in at least five years.

Furthermore, banks are pocketing millions in fees from the so-called SPAC boom, a surge in so-called 'blank check' acquisition companies that have several advantages over traditional IPOs. Around $150 billion have been issued so far this year, more than double the tally for the whole of last year.

Add in the Fed's pledge to keep buying $140 billion in bonds each month as part of its ongoing quantitative easing program, its 'dot plot' forecast for no rate hikes until the end of 2023 and a post-pandemic boom that could trigger a 6.5% GDP growth rate this year -- the fastest since 1984 -- and you have a potent cocktail of earnings potential for the nation's biggest lenders.

JPMorgan shares were marked 0.16% higher in pre-market trading Tuesday to indicate an opening bell price of $156.20 each, down from the record high of $161.69 they reached on March 18.

Goldman Sachs shares edged 0.32% lower to $331.60 each  while Citigroup bumped 0.2% higher to $72.98 each, Morgan Stanley fell 0.2% to $80.10 and Wells Fargo rose 0.4% to $40.94 each.