Despite Falling Rates, JPMorgan Forecasts Strong Profits

On Friday, JPMorgan Chase reported that the U.S. economy remains robust for both consumers and large corporations, a sign that the Federal Reserve may have successfully achieved a soft landing. This outcome features lower inflation coupled with steady economic growth.

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Despite the Federal Reserve’s recent decision to cut interest rates for the first time in four years, the nation’s largest bank continued to outperform expectations on its lending activity during the third quarter. JPMorgan also raised its earnings forecast for the year. The bank’s executives highlighted that consumer spending remains strong and major businesses are confident, reflecting the type of economic environment the Fed aimed to create.

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“These results align with a soft landing,” said Jeremy Barnum, JPMorgan’s Chief Financial Officer, during a conference call. He described the current economic conditions as a "Goldilocks" scenario, referring to a balanced economy that is neither too hot nor too cold.

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Although the Fed’s rate cuts will take time to filter through the banking system, most analysts predict that banks’ profits from lending may eventually decline. This would occur as financial institutions are forced to lower interest rates on loans. However, JPMorgan surprised investors with its strong performance, and fellow banking giant Wells Fargo also reported better-than-expected results. Shares of JPMorgan surged 4%, marking the bank’s best trading day since early 2023, bringing it close to its all-time high. Wells Fargo saw its stock jump by more than 5%. These gains helped lift banking and financial stocks, contributing to broader market growth.

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These bank earnings add to a growing body of economic data suggesting the Fed is on track for a soft landing. Inflation is gradually moving closer to the Fed’s target, job creation remains robust, and unemployment levels are low.

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However, not everything is perfect. At JPMorgan, total deposit balances have decreased, and the bank has warned of higher loan losses in its credit card division, hinting that some consumers are feeling more financially strained. JPMorgan’s profit dropped 2% to $12.9 billion, primarily due to higher losses from credit card loans, but this outcome was still better than analysts had predicted thanks to strong lending profits. Revenue grew by 7%, reaching $42.6 billion.

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Despite the increase in potential losses from credit card loans, Chase Bank customers continue to spend on their credit cards, with balances rising. While JPMorgan expects losses from these loans to increase, executives maintain that the overall outlook is not cause for major concern. “The consumer is in good shape and remains on solid footing,” Barnum noted.

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This sentiment was echoed at Wells Fargo. Chief Financial Officer Mike Santomassimo acknowledged that consumer spending had slightly pulled back, and lower-income customers were feeling more financial pressure. However, the overall economic picture remained stable. “Consumers at the lower income or wealth levels are the ones most stressed,” Santomassimo said.

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Wells Fargo reported a profit drop of 11% in the third quarter, down to $5.11 billion, largely due to higher funding costs for customer deposits. The bank slightly lowered its forecast for net interest income for the remainder of the year but still managed to exceed earnings expectations.

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Wells Fargo's Santomassimo also mentioned that companies have been reluctant to invest in inventory or capital expenditures recently. However, if the soft landing becomes a reality, businesses may start to feel more confident about making investments. He suggested that lower interest rates and the conclusion of the November elections could further boost corporate confidence. “All those factors will come together to help give clients more confidence,” he said.

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For the full year, JPMorgan now projects it will generate $92.5 billion in net interest income, which reflects the difference between what it pays for deposits and what it earns on loans. This is slightly higher than previous forecasts. The bank has been earning record amounts from its loans, taking advantage of its extensive base of low-cost deposits and the Fed’s higher interest rates. However, just weeks ago, JPMorgan executives had cautioned that analysts were overly optimistic about the bank’s ability to sustain these record earnings.

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JPMorgan’s Chief Executive, Jamie Dimon, reiterated on Friday that he still expects lending profits to decline next year. Despite this, JPMorgan’s investment banking fees rose to $2.2 billion for the quarter, up from $1.7 billion a year ago. Trading revenue also increased by 8%, primarily driven by a strong stock market, which kept the bank’s traders active.

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Wall Street is slowly emerging from a period of sluggish activity caused by high interest rates, but trading volumes have not yet returned to the levels seen in 2021 when loose monetary policy fueled a surge in mergers and acquisitions and capital markets activity.

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Despite the positive results, Dimon continued to express concerns about broader risks. He pointed to macroeconomic issues and geopolitical threats, including escalating conflicts in the Middle East and the U.S. government’s record-high debt levels. “It may or may not have a dramatic impact on the economy,” Dimon said during the conference call. “We don’t know. We’re all hoping for the best.”

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