JPMorgan Chase Stock Soars 40% Amid Earnings, Regulatory Easing

JPMorgan Chase & Co. (JPM.US) has experienced a significant surge in its stock price this week, reaching an all-time high. The bank's shares have risen over 40% from their April lows, driven by a combination of favorable factors including strong quarterly earnings, upcoming stress test results, and regulatory easing. However, analysts at Baird have sounded a note of caution, suggesting that the recent rally may have exhausted market expectations.

Baird analysts acknowledge that there are valid reasons to be bullish on large U.S. banks, with JPMorgan Chase being the "gold standard" of the industry. However, they argue that market expectations have become overly inflated, leading to an overvaluation of the stock. David George, an analyst at Baird, wrote in a report, "We understand that it may seem counterintuitive to be bearish at this moment, and we recognize that JPMorgan Chase is the industry benchmark—with leading market share and a robust balance sheet. However, market expectations have been pushed to an unsustainably high level."

The positive outlook for large banks has been fueled by several factors, including strong quarterly earnings, the imminent release of stress test results, and regulatory easing, such as the relaxation of bank capital rules. This optimism has driven JPMorgan Chase's stock price higher for six consecutive days, closing at $288.75 on Thursday, more than 20% above Baird's 12-month target price of $235.

Baird analysts suggest that investors might be better off waiting for a pullback in regional banks rather than chasing the recent gains in large banks. They note a significant valuation gap between large banks and regional banks, which they believe are undervalued. The KBW Bank Index has rebounded over 30% since early April, while regional banks have only risen by 18% during the same period and remain well below their year-to-date highs.

In addition to downgrading JPMorgan Chase's rating from "neutral" to "underperform," Baird also lowered its rating for Bank of America from "outperform" to "neutral," citing that its stock price has reached fair value. As a result, both JPMorgan Chase and Bank of America's stock prices experienced slight declines by the time of publication, while other bank stocks and U.S. stock futures moved higher.

The Federal Reserve is scheduled to release the results of its annual bank stress tests on Friday afternoon, with JPMorgan Chase expected to report its quarterly earnings on July 15, followed by Bank of America the next day.