Big Banks' Modest Earnings Outlook & Strategic Capital Returns: A Tale of Divergence and Dividends

As the second-quarter earnings season for major U.S. banks begins, investors are grappling with a paradox: banks like JPMorgan Chase (JPM) and Goldman Sachs (GS) are trading near multiyear highs despite modest earnings growth expectations. While both institutions face headwinds from declining revenues and macroeconomic uncertainty, their focus on shareholder returns—bolstered by strong capital positions post-stress tests—offers a compelling case for selective long positions. However, the path ahead remains fraught with risks tied to earnings execution and policy shifts.

Earnings Outlook: Subdued Growth Amid Structural Challenges

JPMorgan's Q2 2025 EPS is projected to grow a mere 1.5% year-over-year to $4.47, while revenue is expected to drop 13.6% to $44.05 billion. The decline stems from a contraction in trading revenues and slower loan growth, reflecting broader market volatility and cautious corporate spending. Goldman Sachs, by contrast, faces a more favorable outlook, with EPS rising 12.7% to $9.73 on stable asset management and institutional client activity, even as revenue slips 0.4% to $13.48 billion.

The divergence in fundamentals highlights strategic differences: JPMorgan's universal banking model faces headwinds from its reliance on cyclical trading desks, while Goldman's focus on fee-based businesses (e.g., M&A advisory and wealth management) provides a more consistent revenue stream. Yet both banks are navigating a challenging macro backdrop, including softening global trade volumes and the lingering impact of U.S. tariffs on inflation.

Valuation and Capital Returns: The Buffer Against Earnings Slump

Despite muted earnings, both banks trade at elevated valuations relative to historical norms. JPM's P/B ratio of 2.04 (as of April 2025) and Goldman's 1.33 reflect investor optimism about their capital strength and growth potential. This premium is underpinned by robust capital returns: JPM's dividend yield of 1.98% and Goldman's 1.72% are among the highest in the sector, while buybacks remain a key tool for value creation.

Post-stress tests, which are expected to confirm their strong capital positions, both banks are likely to maintain or even boost shareholder payouts. JPM's capital discipline—prioritizing technology investments over speculative risks—and Goldman's restructuring efforts (e.g., reducing exposure to volatile trading) reinforce their ability to weather earnings softness. For income-focused investors, this combination of dividends and buybacks makes them attractive despite modest top-line growth.

Technical Picture: Bullish Momentum Amid Earnings Risks

Technically, both stocks exhibit bullish momentum. JPM's price of $286.86 is above its 50-day ($268.17) and 200-day ($245.39) moving averages, with a neutral RSI of 60.98. Goldman's stock at $704.95 is similarly above its 50-day ($625.02) and 200-day ($577.26) averages, though its RSI of 68.10 approaches overbought territory. These metrics suggest investor confidence in their long-term narratives, even as near-term earnings risks loom.

Risks to the Thesis: Earnings Misses and Policy Uncertainty

The sector's vulnerability to macroeconomic headwinds cannot be understated. Rising interest rate uncertainty—potentially leading to tighter Fed policy or prolonged volatility—could pressure net interest margins. Additionally, geopolitical risks, such as escalating trade disputes or energy market instability, could further dampen corporate activity.

For JPMorgan, a trading revenue miss (a key focus of its Q2 earnings call) could trigger a sharp sell-off, given its P/B premium. Goldman's performance hinges on M&A activity and asset management fees, which are sensitive to equity market performance. A misstep on either front could unwind recent gains.

Investment Strategy: Selective Longs with Guardrails

Given the data, investors should consider a selective long position in JPMorgan, leveraging its diversified revenue streams and capital strength. Its valuation and technicals suggest room for upside, particularly if it exceeds modest earnings expectations. For Goldman Sachs, the focus on fee-based income and strong buyback potential make it a strategic bet, though its higher P/B ratio demands closer monitoring of M&A trends.

Key Guardrails:
- Avoid overexposure to earnings misses: Set stop-losses 5-7% below current prices.
- Monitor macro indicators: A Fed rate hike or trade policy escalation could trigger sector-wide selloffs.
- Prioritize capital return metrics: Dividend coverage ratios and buyback execution will be critical in maintaining investor confidence.

Conclusion: A Dividend-Driven Play with Caution

While JPMorgan and Goldman Sachs face earnings challenges, their focus on capital returns and strong balance sheets justify cautious optimism. Investors should favor these names over smaller banks with weaker capital positions. However, the path to outperformance hinges on executing on core businesses and navigating macro risks—a tightrope act that demands vigilance. For now, the dividend-driven narrative remains intact, but the next few quarters will test its durability.