JP Morgan (JPM) shares edged higher in early Monday trading after CEO Jamie Dimon published his annual investor letter, which included a hint at succession plans at the country's biggest bank and a stark warning on interest rates in the world's biggest economy.
Investors are on high alert ahead of this week's March inflation report, which is expected to show a modest easing of headline and core price pressures. Federal Reserve officials have been preaching that markets must have "patience" about interest-rate cuts as the economy continues to outperform.
Last week's employment report in fact showed a much bigger-than-expected gain of 303,000 new jobs last month, with wage increases largely in line with Wall Street forecasts. This report came alongside the Atlanta Fed's GDPNow forecasting tool, which boosted its current-quarter growth rate to around 2.5%.
"In spite of the unsettling landscape, including last year’s regional-bank turmoil, the U.S. economy continues to be resilient, with consumers still spending, and the markets currently expect a soft landing," Dimon wrote in his annual shareholder letter. A soft landing in the economy would mean inflation is tamed without triggering a recession.
JP Morgan is the fifth largest bank in the world, with a market value of around $572 billion and around $3.2 trillion in assets under its umbrella.
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The longtime JP Morgan CEO, however, also noted that a good portion of the current growth rate is "fueled by large amounts of government deficit spending and past stimulus."
He added that longer-term costs associated with the green-economy transition, supply-chain restructuring, and rising military spending "may lead to stickier inflation and higher rates than markets expect."
Dimon questions 'soft landing' consensus
"Plus, the ongoing wars in Ukraine and the Middle East continue to have the potential to disrupt energy and food markets, migration, and military and economic relationships, in addition to their dreadful human cost," Dimon said. "These significant and somewhat unprecedented forces cause us to remain cautious."
Related: Key inflation report may derail interest-rate cuts
Dimon also highlighted that U.S. stocks remain at the higher end of historical valuations, while corporate borrowing remains relatively inexpensive given the high level of interest rates.
LSEG data pegs the current forward price/earnings multiple for the S&P 500, a key valuation metric, at around 20.5 times. That's firmly ahead of the five-year average of around 18.9 times but also well below the 24.4 peak recorded in July 1999.
In terms of corporate profits, analysts see collective S&P 500 earnings rising 5% from a year earlier to a share-weighted total of $457.4 billion. That tally is expected to improve to around $494.1 billion over the three months ending in June.
With that in mind, and the broader economy performing well, Dimon says the markets "seem to be pricing in at a 70% to 80% chance of a soft landing."
But Dimon thinks the chances of that outcome are "a lot lower".
"The die may be cast. ... [Small] changes in interest rates today may have less impact on inflation in the future than many people believe," Dimon said. "Therefore, we are prepared for a very broad range of interest rates, from 2% to 8%, or even more."
An outcome at either end of that forecast could range from continued outperformance to a recession that includes elevated inflation.
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"Economically, the worst-case scenario would be stagflation, which would not only come with higher interest rates but also with higher credit losses, lower business volumes and more difficult markets," Dimon cautioned.
New leadership at JP Morgan floated
Dimon's letter was paired with an update from the bank, which included a note that the board is "spending significant time on developing operating committee members who are well-known to shareholders as strong potential CEO candidates."
Current Chief Operating Officer Daniel Pinto, 56, was tabbed as "a key executive who is immediately ready to fulfill the responsibilities of the CEO" should the need arise. Also in the frame: The co-CEOs of JP Morgan's commercial and investment bank, Troy Rohrbaugh and Jennifer Piepszak.
Dimon, 68, who has led the biggest U.S. bank since 2006, underwent emergency heart surgery in 2020. He has also been linked to senior roles in government, as well as a candidate for the U.S. presidency, over the past five years.
More Economic Analysis:
- Bond markets tell Fed rate story that stocks still ignore
- February inflation surprises with modest uptick, but core pressures ease
- Vanguard unveils bold interest rate forecast ahead of Fed meeting
JP Morgan is scheduled to report first-quarter results before the market opens on Friday. Analysts expect the financial services giant to report a profit of $4.17 a share, down 3.6% from a year earlier, on revenue of around $42 billion.
JPMorgan shares were marked 0.6% higher in early Monday trading to change hands at $198.59 each, extending the stock's year-to-date gain to around 15.4%.
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