What happened
JPMorgan Chase, Goldman Sachs and Bank of America all report second quarter results before the opening bell in New York on Tuesday 14 July, firing the starting gun on the American earnings season.
Analysts expect JPMorgan, the largest bank in the United States, to post earnings per share of 5.80 dollars, up 15 percent from 4.96 dollars in the same quarter last year, on revenue of roughly 51.3 billion dollars, a rise of about 14 percent. Earnings per share is simply the total profit divided by the number of shares in issue, which is how investors compare profitability across companies of different sizes.
Goldman Sachs is forecast to report revenue of 16.49 billion dollars, up 13.1 percent on the year, with strength expected in investment banking and trading. Goldman is far more exposed to deal making and market volatility than a traditional high street lender, which cuts both ways.
The optimism rests on momentum from the first quarter, when JPMorgan reported a 28 percent increase in investment banking fees, driven by a revival in mergers and acquisitions and a wave of companies issuing debt.
Why it matters
Bank results are the closest thing markets have to an economic X ray. Banks sit in the middle of everything: they see whether households are still spending on credit cards, whether small businesses are borrowing, whether people are falling behind on loan payments, and whether companies feel confident enough to do deals.
Three numbers matter more than the headline profit. Credit card spending tells you about consumer confidence. Loan loss provisions, which is money banks set aside for borrowers they expect to default, tell you what the bank fears is coming. And net interest income, the gap between what banks charge borrowers and pay savers, tells you how the rate environment is treating them.
The timing is awkward. These results land in the middle of an oil shock and hours after an inflation report that may reset expectations for interest rates. A great set of numbers could be entirely overshadowed by what management says about the second half.
For British readers, the read across is direct. Barclays, HSBC and Lloyds report later this month, and the US banks set the template. Strong trading and investment banking revenue at Goldman usually means good news for Barclays, which runs a similar business.
Explained simply
A bank is a shop that buys money cheaply from savers and sells it expensively to borrowers. The profit is the gap between the two prices, minus whatever the borrowers fail to pay back.
Walk through it slowly. You deposit 1,000 pounds and the bank pays you perhaps 2 percent. It lends that money to someone buying a car and charges them 8 percent. The 6 percentage point gap is called the net interest margin, and on a big enough balance sheet it produces enormous profits.
The risk in that model is simple: some borrowers do not pay back. So banks guess in advance how many will fail and set money aside for it. That set aside money is the loan loss provision, and it comes straight out of profit. When a bank suddenly increases its provisions, it is telling you it has seen something worrying, and that matters far more than one quarter of earnings.
Investment banks like Goldman run a different shop. They advise companies on takeovers, help them raise money, and trade in markets. That business is feast or famine. It booms when confidence is high and deals are flowing, and it collapses when everyone is frightened.
So a strong quarter from Goldman is not just a company story. It is evidence that boardrooms across corporate America felt confident enough between April and June to commit to deals, which is a genuine signal about where the economy is heading.
What it means for you
If you hold a global tracker fund or an S&P 500 fund in an ISA or pension, banks are a substantial chunk of what you own, and JPMorgan alone is one of the largest companies in the index. A strong start to earnings season tends to lift the whole market, so these numbers touch your portfolio even if you have never bought a bank share.
Watch what banks say about savings rates. American and British banks alike have been slow to pass on rate rises to easy access savers while quickly repricing loans. If net interest income comes in strong, that is partly because savers are being underpaid. The practical response is to move cash out of a legacy high street account paying under 2 percent and into a competitive easy access account, where the best rates sit around 4 percent. On a 20,000 pound balance that is a difference of roughly 400 pounds a year for about fifteen minutes of admin.
Loan loss provisions are the number to check if you care about the economy rather than the market. If JPMorgan raises provisions sharply, it is signalling that it expects households and businesses to start defaulting. That would be a leading indicator of a downturn, and a reason to make sure your emergency cash buffer is genuinely three to six months of expenses.
If you hold UK bank shares such as Lloyds or Barclays, expect the US results to move them today regardless of anything happening in Britain. Lloyds fell 1.2 percent on Monday, and UK bank shares tend to trade in sympathy with their American peers.
The bigger picture
Bank earnings season has been a reliable early warning system for two decades. The provisioning cycle turned before the 2008 crisis was visible in the headlines, and again in early 2020. When banks start quietly setting aside more money, they are usually right.
The interesting tension this quarter is between two forces. Deal making has clearly recovered, which is good for profits. But the interest rate outlook has just turned hostile, and rising rates squeeze borrowers and eventually raise defaults. The banks are enjoying the good half of that trade right now.
What to watch beyond the numbers: guidance for the second half, any commentary on the oil shock and its effect on corporate borrowers, and whether management expresses any view on where interest rates go next. Bank chief executives are often more candid about the economy than central bankers are allowed to be.
