Banks had a great week, and they can thank JPMorgan Chase for that. Not every bank is JPMorgan, however, and investors should be selective in choosing which ones to buy.
JPMorgan held its investor day on Monday, and it was well celebrated by investors. Perhaps it was the fact that the company maintained its target for a 17% return on tangible equity, or maybe it was because CEO Jamie Dimon talked up the strength of the U.S. economy and the U.S. consumer.
By the end of the week, JPMorgan stock had gained 12%, its best week since June 2020. "Based on the investor day, we believe JPM's mojo is back," writes RBC Capital Markets analyst Gerard Cassidy.
The entire banking sector got its mojo back, too, at least for the week, with the SPDR S&P Bank exchange-traded fund $(KBE)$ advancing 7.4%. But by the end of the week, Credit Suisse analyst Susan Roth Katzke had downgraded shares of Citigroup $(C)$ to Neutral from Outperform, even though the fundamental story hadn't changed. Citi is still restructuring its business, its stock is still cheap, and Katzke didn't even adjust her estimates. What had changed was the price: Citigroup has gained 15% since May 12, putting the stock within spitting distance of her $58 target price.
One piece of good news from JPMorgan that should apply broadly: The bank raised its net interest income forecast to $56 billion, up from its previous guidance of $53 billion, thanks to higher interest rates and still low deposit rates. That's a fancy way of saying it can earn a decent amount on the money it invests while paying its customers very little. But banks still have other problems to deal with, including slowing economic growth and weakening credit.
And while banks look cheap -- they're trading at about nine times 2023 earnings-per-share estimates, or 55% of the S&P 500's, well below the 70% to 80% historical level -- they're not cheap enough to reflect a recession, explains Evercore ISI analyst John Pancari. "We recommend banks with catalysts, and those that could present upside from better [net interest income] sensitivity...but with likely less downside risk from credit weakness," he writes. His top picks include Wells Fargo $(WFC)$, $First Republic Bank(FRC-N)$ $(FRC)$, and KeyCorp $(KEY.AU)$.
As for the SPDR S&P Bank ETF, it appears to have found support near $45, roughly where it had been in January 2021. If those levels hold, it could be a sign that the economy is improving -- and that banks are ready to make another run.