Despite the stock market theory saying that banks should benefit from a rising interest rate environment, it has been one of the tougher years in recent memory for the financial sector. The iShares US Financial ETF (NYSEARCA: IYF) is down 25% from the all-time high it tagged back in January and is in fact now below its pre-pandemic level. It’s fair to say that Wall Street banks are struggling with a collapse in IPOs and debt and equity issuance this year, which is a complete reversal from the market environment that drove stellar results last year. The change has been triggered by broad declines in financial assets, increasing pessimism over the possibility of a recession and the Russian invasion of Ukraine.
But does that mean investors should stay away indefinitely or are there potential opportunities starting to open up in individual names? With fresh earnings after being released let’s take a look at two of the bigger names on Wall Street and see if there’s enough long term potential to justify a starting position.
Morgan Stanley (NYSE: MS)
Morgan Stanley shares are down more than 30% from their February high and in fact set a fresh low yesterday morning before recovering into the close. The volatility was driven by the release of their Q2 earnings which came out before the bell rang to start the session. Both topline revenue and bottom line EPS missed expectations, the former contracting 11.5% year over year.
It wasn’t exactly the surprise beat investors would have been hoping for, and with shares already at 52 week lows you’d have to be thinking there’s a good chance this will sink them further. The bank’s results were hurt by a steep 55% decline in investment banking revenue. This confirmed what some analysts had feared for Morgan Stanley, which runs one of the larger equity capital markets operations on Wall Street.
But there are signs that we’re nearing capitulation and for those of us with a long enough investment horizon it’s worth taking note of the underlying strength still in play at Morgan Stanley. Management saw fit to raise the quarterly dividend by 11%, hardly the move of a company that sees things getting worse. On the contrary, this is considered one of the most bullish signals a company can give to the market. Is Morgan Stanley telling investors it's time to start backing up the truck?
JPMorgan (NYSE: JPM)
JPMorgan has had an even rougher first half of 2022 than its cousin across the street, with shares down almost 40% from their high last October. But what’s interesting here is they were recently upgraded to full Buy rating by the team over at Citi.
Earlier this week, Citigroup analyst Keith Horowitz upgraded them as he sees an unrecognized upside potential on its EPS while the stock no longer reflects a premium valuation. In a note to clients he wrote that "we believe investors will first look to high-quality franchises with strong management teams and a sound balance sheet, and we believe JPM fits this narrative."
The move and bullish comments will go some way to offsetting the company’s poor results from yesterday, which missed analyst expectations for both quarterly revenue and earnings per share. At least the bank’s revenue was able to move in the right direction, registering a small increase year on year compared to Morgan Stanley’s which shrank. Still, considering the stock is close to new lows, investors getting involved are going to have to be wary about trying to catch a falling knife. Another 10% lower will see JPMorgan shares trading at the level they held during the depths of the pandemic sell-off in 2020, and it’s hard to see them give that up without a fight. If you were to pick a moment to really go for it, it is around now when they’re on the verge of what could well be final capitulation.
