JPMorgan vs. Goldman Sachs (JPM, GS)

JPMorgan Chase & Co. (JPM) and Goldman Sachs Group, Inc. (GS) are two of the largest and most respected banks/investment brokerages. Both have seen rising stock performance over the past several years, benefiting largely from low interest rates and Federal Reserve policies. Here, we take a look at where both companies are headed and the likelihood of positive momentum with interest rates expected to rise even further.

Since the Fed began raising interest rates in Dec. 2015, both JPM and GS have substantially gained with JPM outpacing. From Dec. 2015 to Oct. 2018, JPM and GS have returns of 78% and 21% respectively. However, it appears likely that one caveat will create a slight speed bump for GS slowing its momentum and effectively giving JPM an even greater lead. In Nov. 2018 a lawsuit unfolded revealing fraud among two Goldman Sachs bankers involved in an Abu Dhabi fund that may cost the bank millions in refunds and legal costs.

Since Dec. 2015 the Fed has increased the federal funds rate from 0.25% to 2.25%. While these increases directly affect the borrowing of funds between federal reserve banks, they also form the base rate for the fixed income investing market and send signals to investors on the market’s direction for everything from savings accounts to junk bonds. As such, this also affects a line item in bank balance sheets known as net interest income.

Typically, rising risk-free rates are somewhat of a negative factor for equities as investors often weigh the risk-return tradeoffs more acutely and move money to take advantage of higher risk-free returns. However, in the case of rising rates, financials and banks stocks, in particular, have one advantage over other sectors, net interest income typically rises when they can increase borrowing rates for investors while still keeping standard deposit and savings rates low. (For more, see: How Interest Rates Affect the Stock Market.)

Let us begin with JPMorgan.

Market Cap: $383 billion

52-Week Range: $97-$119

Trailing P/E: 13.53

Return on Equity: 12%

Annual Dividend Yield: 2.29%

3-Year Total Return: 19.35%

In JPMorgan’s third-quarter 2018 results, the company had a cumulative net income of $26.4 billion on revenue of $82.9 billion with net interest income of $40.7 billion. This compared to net income of $20.2 billion in 2017 on revenue of $78.2 billion and net interest income of $37.1 billion.  

For more details see the company’s third-quarter earnings presentation.

Market Cap: $71.9 billion

52-Week Range: $190-$275

Trailing P/E: 14.04

Return on Equity: 7.16%

Annual Dividend Yield: 1.62%

3-Year Total Return: 1.44%

Goldman Sachs has been making inroads into the personal finance market, launching its new Marcus platform for customers of all income levels and making a large acquisition that gives it the ability to also provide banking services for a broader range of consumers. These factors along with some cutting-edge technology infrastructure updates and a new CEO have helped its stock price as rates rise. Management believes these factors and other growth projections will help to keep its outlook positive for the future, but as of Nov. 2018, it appears the company and investors will have to face a slew of allegations around the fraud of two bankers who charged exorbitant fees and looted funds from a multimillion-dollar deal with the Abu Dhabi Fund also known as deal 1MDB.

In the third quarter of 2018, GS reported cumulative revenue of $28 billion versus $24 billion in 2017, net income of $7.9 billion versus $6.2 billion in 2017 and net interest income of $14.2 billion versus $9.3 for a 52% increase.

For more details see Goldman Sachs' third-quarter earnings report.

JPMorgan has maintained and improved its edge over Goldman Sachs. As rates rose from Dec. 2015 to Oct. 2018 JPM and GS have returns of 78% and 21% respectively. The 1MDB scandal has substantially widened the lead for JPM with a  return of 70% compared to 9% from GS when examining the period of Dec.1, 2015, to Nov. 21, 2018. Year to date Goldman Sachs’ total return has been a much weaker -24% versus 3.7% for JPM. Troubled by past scandals and a high fee culture, the 1MDB lawsuit could potentially tarnish both the near term and longer-term outlook for GS as other banks such as JPM hope for continued strong momentum in a rising rate environment.

Some may argue that the GS sell-off could create a buying opportunity with the stock hovering at its 52-week support level. However, investors should proceed with caution as the expenses of the fraud deal unfold and other banks move forward with less risky circumstances. JPMorgan has emerged from the financial crisis, leading the banking sector with one of the most rapid and effective Dodd-Frank regulatory implementations in the industry. This along with the rising rate environment has helped JPM to post superior returns to its competitor Goldman Sachs and the banking industry at large. This can be seen in the benchmarks below, which will be important for investors to follow as the investment market and banking sector continue to navigate through an environment with multiple interest rate hikes still expected to continue in the near term.

One-year benchmarking returns:

JPM 10.27%

GS -18.46%

S&P 500 2.73%

S&P Banks Select Industry Index -5.80%