Shares in JPMorgan Chase & Co. (NYSE:JPM) jumped on last week’s blowout jobs report and now investors have to feel good about JPM stock’s chance to reclaim record levels soon.
At $66 and change, JPM stock isn’t that far off its all-time closing high. Nine months ago, it was knocking on the door of $69 a share. That represents less than 5% in additional upside after Friday’s move of 2.7%.
The technicals are favorable, the market is setting new records session after session and the news flow continues to support a Federal Reserve rate hike sooner than later.
But beyond that milestone, JPM could very well be priced to disappoint. A number of Wall Street analysts certainly think so. Citigroup analyst Keith Horowitz on Monday cut his rating on JPMorgan to neutral. The market will enjoy a September rate hike if it does indeed come to pass, but the analyst says it’s going to take more than that.
After all, banks need a sustained cycle of tightening that creates a steeper yield curve. A one-off rate hike isn’t going to cut it. Horowitz has a target price of $65 on JPMorgan stock, which implies there’s downside ahead.
Overestimating JPM Stock?
A neutral view on JPM stock isn’t exactly a popular view, Horowitz acknowledges. From his note to clients:
“JPMorgan is probably one of the most consensus longs on the buy side and sell side (76% of the 38 analyst ratings are Buy), which we believe is reflective of a strong management team that has been able to weather the tough macro and regulatory environment better than peers. So in the context of a group that we view as fairly valued at 10.3% cost of equity… and our view that JPMorgan forward EPS estimates are about 2% too high for 2017 and 2018, we no longer see significant near term upside (15% over one year) to warrant a Buy.”
But it is wise for investors in bank stocks to curb their enthusiasm about the next Fed rate increase. Yes, this will begin to relieve some pressure on banks’ net interest margins, but short-term rates are still going to be sitting at pitiful levels. The central bank is hardly opening the spigot.
After the immediate celebratory upside of a rate hike, JPM stock will face fundamentals that haven’t changed all that much. Whether that sets it up for underperformance remains to be seen, but there are other big bank stocks offering better bets.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
