Market Rally Broadens Out: Banking Giant Hits 52-Week High

“I never try to predict the market.” – Warren Buffett

Recession fears continue to swirl around Wall Street, as concerns have grown that the Fed raised interest rates too far and too quickly. Despite an impressive start to the year for stocks, Wall Street strategists are more bearish regarding their second-half outlooks than at any point in history, as the average forecast calls for a negative final six months of 2023.

Most strategists have been predicting a recession since January, even though evidence continues to mount that we will avoid a bearish outcome this year. They got it wrong from the start, and now they’re doubling down on their conviction.

But the stock market doesn’t reward blind faith. It’s much better to admit when you’re wrong and move on quickly, keeping losses small and listening to the market. It’s smarter than any one of us.

The truth is the economy remains on solid footing, supported by a resilient consumer and strong labor market. The unemployment rate remains near historic lows. Inflation has shown repeated signs of deceleration. And the Fed, which is set to raise rates again on Wednesday, is likely very close to the end of this hiking cycle.

This stock market rally is the real deal. The market is telling us to expect good things in the future, as the economy chugs along and the forward earnings picture evolves to support bullish outcomes.

Market Rally Expansion: Breadth Improves

We’ve heard all year how the rally was being driven solely by big tech, but the naysayers have it wrong once again.

The S&P 500 Advance/Decline line is a breadth indicator used to illustrate how many stocks are participating in a stock market rally or decline. When major indexes are rallying, a rising A/D line confirms the uptrend, showing strong participation. The A/D line has been a leading indicator as breadth tends to lead price. And what did it do most recently? Back in June, the line hit a new high as the rally broadened out.

The Dow Jones Industrial Average, which outperformed during last year’s bear market but had lagged to start this year, has now joined the rally. The Dow first broke through a downward-sloping trendline. Secondly, it went on to retest that trendline, making a higher low in the process. And finally, the Dow ultimately broke out and made a higher high as sectors like industrials and financials begin to show strength.

Megabank Hits Fresh 52-Week High

Banks were hit hard earlier in the year, as a regional banking crisis led to the failure of three U.S. banks. But concerns surrounding the fiasco have mostly faded, as recent stress tests have shown that the financial system remains healthy and the megabanks would be able to weather a severe economic downturn.

This has led to the beginning of a resurgence in banking stocks, which are undervalued and also provide income in the form of dividends. JPMorgan Chase JPM, a Zacks Rank #1 (Strong Buy), is a cornerstone of the banking industry. One of the largest financial services firms in the world, JPM boasts assets valued at nearly $4 trillion.

The banking behemoth beat on both the top and bottom lines in the second quarter, as earnings of $4.37/share on revenues of $41.31 billion easily topped estimates. JPM has surpassed earnings estimates in each of the last four quarters, averaging a 15.29% positive earnings surprise over this timeframe.

The stock is breaking out and hitting a series of 52-week highs on increasing volume. Analysts are in agreement in terms of earnings revisions and have bumped up estimates across the board. For the full year, estimates have been raised by 7.72% in the past 60 days. The Zacks Consensus Estimate for fiscal 2023 now stands at $15.21/share, reflecting potential growth of 25.81% relative to last year.

The company took advantage of the regional banking crisis earlier this year, gobbling up assets and personnel from Silicon Valley Bank and First Republic Bank at a substantial discount. JPMorgan Chase has been consistently raising its dividend since the financial crisis, and recently announced a 5% dividend hike to $4.20/share which will start in the third quarter.

Keep an eye on the sector rotation into areas like financials and industrials as this rally broadens out.

Disclosure: JPM is a current holding in the Zacks Income Investor portfolio.

JPMorgan Chase & Co. (JPM): Free Stock Analysis Report

SPDR Dow Jones Industrial Average ETF (DIA): ETF Research Reports

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