Fourth-quarter earnings season kicks off this week, with major U.S. bank earnings reports starting on Friday morning. Analysts are expecting a messy quarter from bank stocks given the recent tax reform changes, but JPMorgan Chase & Co. (NYSE: JPM) investors have plenty of reason for optimism.
Wall Street analyst are anticipating JPMorgan will report fourth-quarter earnings per share of $1.69 on revenue of $24.99 billion. Those numbers would represent 6.9 percent and 2.7 percent year-over-year growth, respectively.
Things may get interesting, however, due to one-time charges potentially confusing the market. Although the tax cuts should be an earnings tailwind for banks in the long term, Barclay's estimates JPMorgan could take roughly a 35 percent one-time hit to net income in the fourth quarter due to the new tax plan. Large banks will be forced to adjust their balance sheets to account for changes to deferred tax assets and liabilities under the new tax code.
Investors will be looking for signs of stabilization in the company's trading revenue as well. Lack of volatility in global financial markets has weighed on bank trading revenue in recent quarters. JPMorgan reported a 21 percent decline in trading revenue in the third quarter, including a 27 percent drop in fixed-income trading.
Investors will also be watching for what JPMorgan plans to do with its long-term tax savings, including any repatriated cash it may bring back into the country during the tax holiday. In June, the bank announced a staggering $27 billion capital return program, a record amount for a U.S. bank.
JPMorgan stock outperformed throughout the fourth quarter as investors considered the potentially bullish environment for banks in 2018.
"Financial stocks have had a nice run over the last few months, buoyed by investor optimism about tax cuts, economic growth, and rising interest rates," TD Ameritrade chief strategist JJ Kinahan says.
In December, Buckingham Research Group analyst James Mitchell said JPMorgan and Wells Fargo & Co ( WFC), which also reports on Friday, will get a big earnings boost from the tax cuts in the long term.
"With valuations in line with long-term average multiples, we believed the market was not pricing in upside from tax reform, deregulation or materially higher economic growth [and] interest rates," Mitchell said.
Keefe, Bruyette & Woods estimates tax cuts alone will increase JPMorgan's 2019 net income by 17 percent.
[See: 11 Ways to Buy Bank Stocks.]
Buckingham has a "buy" rating and $135 price target for JPMorgan stock.
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