The economy is still humming, tariffs and all, say top banks

JPMorgan and Citi reported stronger-than-expected Q2 results, signaling robust consumer spending and borrowing, alongside a significant rebound in investment banking activity. Despite prevailing economic uncertainties, including rising inflation and a rocky labor market, both banks highlighted unexpected resilience among consumers and businesses, with JPMorgan's CFO noting a struggle to find signs of weakness. This performance, particularly the uptick in M&A and capital raising despite tariff concerns, suggests a more resilient economic backdrop than anticipated, potentially influencing market expectations for Federal Reserve rate cuts given persistent inflationary pressures.

Analysis

JPMorgan Chase and Citigroup reported strong quarterly results that challenge prevailing economic uncertainty, driven by sustained consumer resilience and a significant rebound in investment banking. JPMorgan's Consumer and Community Banking division saw revenue climb 6% to $18.8 billion, with credit card spending up 7% and charge-offs holding steady at 3.4%, indicating healthy consumer balance sheets. Similarly, Citigroup reported an 11% increase in branded cards revenue and a 5% rise in average card loans. This consumer strength is particularly notable given the backdrop of rising inflation, which hit 2.7% in June. Concurrently, investment banking fees surged, with JPMorgan up 7% and Citigroup up 13%, signaling that corporations are proceeding with M&A and capital raising despite tariff concerns. This unexpected strength in both consumer and corporate activity has prompted a recalibration of market expectations, with analysts now dialing back the probability of near-term Federal Reserve interest rate cuts.

Key Decisions for Investors

• Given the robust consumer performance and a sharp rebound in investment banking, investors should consider these results a strong signal of the banking sector's ability to navigate macroeconomic headwinds, potentially warranting a bullish stance on JPM and C.
• Monitor credit quality metrics in subsequent earnings reports, specifically charge-off rates, as any deterioration from the current stable levels would be a key early indicator of waning consumer resilience.
• Remain cautious regarding the broader market outlook, as the reported rise in inflation to 2.7% could force the Federal Reserve to delay or forgo anticipated rate cuts, creating a potential headwind for equities and economic activity.