Big bank stocks have soared in six months but do geopolitical tensions threaten economic stability? 🪖 Weathering impacts like oil and food supply since the War on Ukraine and tension in the Middle East is not new. But their impact on the global economy was flagged last week by JPMorgan Chase (JPM) Chair and CEO Jamie Dimon in his letter to shareholders. 

The global banking behemoth kicked off the first quarter (Q1) earnings season on Friday. Dimon said JPMorgan ‘historically has worked across borders and boundaries,’ and that the company ‘will do its part to ensure that the global economy is safe and secure’. But while he highlighted the resilient US economy - with steady consumer spending - and acknowledged some growing pains around the transition into a ‘green economy’ and ‘inflationary pressures’, he flagged ‘downside risks to watch’: 

‘Quantitative tightening is draining more than US$900 billion in liquidity from the system annually — and we have never truly experienced the full effect of quantitative tightening on this scale. Plus the ongoing wars in Ukraine and the Middle East continue to have the potential to disrupt energy and food markets, migration, and military and economic relationships, in addition to their dreadful human cost. These significant and somewhat unprecedented forces cause us to remain cautious.’ - Jamie Dimon, JPMorgan Chase

His sobering letter not only sparked a JPMorgan stock slump, dropping more than 6% after the earnings announcements - which had been overall positive - but his outlook may have impacted the banking sector as a whole, with bank stocks falling across the board last week.

Do bank stocks keep going up?

The S&P 500 is used as a benchmark for the US economy, and some analysts expect the index to grow around 11% in 2024. Over the past six months, AI has helped the S&P 500 to climb around 15% - mostly notably due to growth of many of the Big Tech stocks, such as Nvidia (NVDA). 

But bank stocks’ growth has soared above the S&P 500 index in six months. 📈 The lowest of the top 10 banking stocks has grown around 10%, and others have climbed as much as 43% since last October 2023. This catapults banks into Big Tech stock territory - comparable with the six month performance of companies like Meta (META) which has grown 56.38% and Amazon (AMZN) which is up 39.24%.

‍‘The biggest US bank stocks have soared over the past six months, outpacing the S&P 500’s gains. But whether they can maintain that momentum is the big question entering earnings season.’ Bre Bradham, Bloomberg

In order of market cap from more than half a trillion dollars to US$13 billion, the 10 largest banks listed on the US share markets are:

• JPMorgan Chase (JPM) has a market cap of US$525.277 billion. It’s stock is up 30.79% year-over-year (YOY)
• Bank of America (BAC) has a market cap of US$283.669 billion. BAC stock has climbed 18.37% YOY
• Wells Fargo (WFC), with a market cap of US$199.491 billion is up 37.94% YOY
• Morgan Stanley (MS) holds a market cap of US$141.501 billion and is down 2.58% YOY
• Citigroup (C) holds a market cap of US$111.697 billion, and is up 17.85% YOY
• UBS (UBS) has a market cap of US$91.918 billion has grown 34.34% YOY
• PNC Financial Services (PNC), with a market cap of US$59.502 billion, is up 19.56% YOY 
• Capital One Financial (COF) has a market cap of US$52.943 billion and has climbed the most of all the banks in one year, up 42.27% YOY
• Fifth Third Bancorp (FITB) holds a market cap of US$23.665 billion and is up 26.72% YOY
• KeyCorp (KEY), with a market cap of US$13.383 billion, is up 17.22% YOY

Big banks need AI

Only three big banks have put their pedal to the metal with AI. 🏎️ JPMorgan Chase has shot out of the gates ‘accelerating away from the pack’ of the 50 largest global banks when it comes to backing an AI future in the sector. JP Morgan is ‘responsible for as much as 45% of all AI research published by the banks in 2023’, according to the April 2024 Evident AI Innovation Report. Other banks joining them are Capital One and Royal Bank of Canada (RY), as well as some small independent banks. 

In his shareholder letter, Dimon likened the impact of AI to those of the printing press, electricity and the internet, ‘and possibly as transformational as some of the major technological inventions of the past several hundred years’. JPMorgan is spending as much as US$12 billion per year on AI tech, employing more than 2,000 machine learning and AI experts in their business units, from fraud to marketing.

But the pathway to AI adoption in banking is slow-moving. 🐌 Only a handful of AI tools are ready to get to work. Morgan Stanley is ranked 17th in Evident’s AI report. Head of firmwide AI at Morgan Stanley Jeff McMillan spoke to Axios about the company’s ‘direct connectivity’ with Open AI, and highlighted both progress and roadblocks.

‍‘We've deployed two use cases. But what about a world where we might have 100,000? This idea that you can take 100,000 documents, throw them into a system and somehow expect generative AI to make sense of that: It's a fantasy. There's not a single thing that we have produced or probably will produce for some time that is not going to go to a human being for ultimate final checking.’ - Jeff McMillan, Axios

Morgan Stanley’s money laundering red flags

Is dirty money getting clean in some big US banks? 🚩 AI may be the least of Morgan Stanley’s immediate concerns, however, with US regulators circling amid accusations of money laundering,  according to the Wall Street Journal. Money laundering is the process where money acquired through criminal activity is funnelled in and out of the financial system, such as through banks, to make it appear legitimate. The news may have contributed to Morgan Stanley’s share dropping nearly 5% since last Thursday, with the company reporting Q1 earnings this week..

Abrdn’s collective eye-rolling at ongoing press jibes about the company’s ‘irritable vowel syndrome’ looks whimsical compared to possible threats facing the global financial sector. But the AI potential in banking may yet open a world of creative solutions for the sector and the global economy as a whole.

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