Weekly Equities Forecast: JP Morgan, Wells Fargo, Citigroup

US  Federal Reserve Chair Jerome Powell’s testimony next week, along with US inflation data, will top the agenda next week, along with US Q2 bank’s earnings kicking off earnings season.

JPMorgan, Wells Fargo, and Citigroup, all set to report Q2 earnings on July 12, have shown relative strength in their share price. Their diverse business models and uptick in investment banking activity have allowed them to deflect concerns over exposure to real estate and office property loans, demonstrating their resilience in the face of economic challenges. The earnings come as all 31 banks passed their annual stress test, underscoring the strong capital positions and ability to withstand adverse economic conditions.

What to watch:

1. Investment banking recovery

Investment banking is expected to be a strong revenue driver as fees recover, boosting Wall Street lenders. Mergers and debt deals are finally picking up after a weak two years. Expectations are for an average 30% increase in investment banking revenues at the big banks in Q2 compared to the same period a year earlier.

Lost deals that were brokered in the quarter included Exxon Mobil's $60 billion acquisition of Pioneer Natural Resource and Aon’s $13 billion purchase of insurance broker NFP.

Debt offerings are also a bright spot, as confidence in the economies made investors more willing to jump into riskier deals. One such example is Peloton's refinancing of 1.35 billion in debt, led by JP Morgan and Goldman Sachs.

2. Rising defaults

Investors also consider that high interest rates for longer could mean that more borrowers default on their loans. Expectations are for JP Morgan, Bank of America, Citi, and Wells Fargo, the four largest U.S. banks by deposit, to report over 7 billion in bad loan charges in Q2, which would be a 50% increase from a year earlier.

Rising bad loans and defaults could contribute to muted earnings growth, offsetting strength in investment banking.

JPMorgan Q2 earnings preview

The largest lender in the US and the biggest bank by assets is expected to post EPS of $4.13 on revenue of $4.9 billion, down from EPS of $4.75 a year earlier. The results come as JP Morgan has risen 9.2% across the quarter, outperforming the S&P 500, which gained 6.3% during the second quarter. The share price also reached an all-time high in recent sessions, outpacing the broader equity markets with year-to-date gains of 22%

JPMorgan forecast – technical analysis.

The share price trade above their upwardly sloping 50 and 100 SMAs. The price has eased back from an all-time high of 209 and is testing support at 204, the May high. While the price remains above 198, buyers have control. Below 190, the June low comes into focus.

Wells Fargo Q2 earnings preview

Wells Fargo is primarily focused on individual consumers rather than investment banking. It continues to see net interest income squeezed amid higher deposit rates due to high interest rates and lower returns on its loan portfolio. Given its revenue structure, Wells Fargo should be a major beneficiary when the US Federal Reserve starts to cut interest rates, which could be as soon as this summer.

In addition to earnings, US inflation data and Fed Powell’s testimony could influence the share price.

Wells Fargo is expected to report Q2 EPS of $1.28 on revenue of 20.23 billion. Profit estimates have increased across the quarter, up from $1.19 at the start of April. Wells Fargo's share prices reflected some of this optimism, rising around 23% year to date, outpacing JP Morgan and the S&P 500.

Wells Fargo forecast – technical analysis

The share price has come away from its ATH of 62.50, reached in May, and trades around 59.50 at the time of writing. The recent recovery from 56.30 ran into resistance at 61.10, the multi-month rising trendline. Buyers will look to rise above here to extend gains to 62.50 and fresh ATHs.

Sellers will need to take out 56.30, the June low, to create a lower low.

Citigroup Q2 earnings preview

Wall Street expects Citigroup to post Q2 EPS of $1.41 on revenue of $20.09 billion, down slightly from the $1.48 EPS projected earlier in the quarter.

The markets will be watching closely for signs of how the bank's turnaround is progressing. Rising costs hurt profits in Q1, as employee severance payments and re-organization costs pushed expenses up to $14.2 billion.

Citigroup is expected to benefit from a pickup in investment banking activity thanks partly to a rise in M&A activity as well as capital raising.

Citigroup forecast – technical analysis

Citigroup recovered from the 100 SMA, rebounding higher and reaching a fresh ATH of 65.22. Buyers, supported by the RSI above 50, could look for a rise above this level to reach record highs.

Support can be seen at 62.10, the 50 SMA. A break below here negates the near-term uptrend and exposes the 100 SMA at 60, also the psychological level.