The biggest morning of earnings season delivered, and then some.
JPMorgan (JPM) reported the largest quarterly profit in the history of American banking, with record revenue across every one of its businesses. The largest U.S. bank by assets is up around 2% in Tuesday trading. It was the loudest print in a morning where five giants reported at once, and nearly all of them beat.
Two forces did the heavy lifting
The results were not built on steady lending. They were built on Wall Street.
Two things drove the quarter. A record run of mergers and IPOs, capped by last month's blockbuster SpaceX debut, filled investment-banking fee pipelines. And the volatility from the Iran conflict and the Hormuz standoff sent trading desks into overdrive. Banks make money when clients trade nervously, and clients traded nervously all quarter.
That is why the profits and the warnings arrived together. The same executives reporting records also cautioned about risks to the economy and to markets. A quarter powered by war-driven volatility is not a quarter anyone wants to repeat.
Goldman was the standout
Goldman Sachs (GS) put up the sharpest beat. It earned $20.98 per share and posted a 23.5% annualized return on equity, a level most banks only dream about. That is a large jump from the $17.55 it earned in the first quarter, and the stock is up around 7% on the day.
Goldman is the purest play on the two forces that defined the quarter. It advises on the deals and runs one of the biggest trading operations on the Street. When dealmaking and volatility surge at the same time, no big bank captures more of it.
Chief executive David Solomon used the morning to weigh in on the Fed fight too, telling CNBC that "Fed independence has served us well." Bank leaders are watching the new chairman as closely as anyone.
Citi and Wells rode the same wave
Citigroup (C) reported net income of $5.8 billion, up about 45% from $4 billion a year ago, on its best quarterly revenue in a decade. Citi has long been the cheapest of the big banks, trading around its tangible book value while JPMorgan commands roughly twice that. A quarter like this is the kind that slowly closes that gap.
Wells Fargo (WFC) also beat, helped by a higher net interest margin, the spread between what a bank earns on loans and pays on deposits. Bank of America (BAC), the most deposit-driven of the group, rounded out the morning.
The read for investors
The group trades cheaply against the market. The big banks sit in the low-teens on forward earnings while the S&P 500 sits in the low-20s, a discount that reflects how cyclical their profits are.
That is the catch under the records. Trading and dealmaking are the least predictable lines a bank has. Strip out the war-driven volatility and the SpaceX-sized deals, and next quarter is a harder comparison. The split reaction says it all. Goldman and JPMorgan are higher on the day, while Citigroup and Wells Fargo are lower even after beating, a sign traders are already asking whether this pace can hold.
Morgan Stanley (MS) reports Wednesday and will show whether the same trading-and-dealmaking surge carried through the rest of Wall Street.
