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Not all investors are fully aware of the massive wave about to hit the financial sector, and they cannot miss it. Banking stocks are the one group that typically leads the stock market higher or lower, depending on where the business cycle is headed. However, not all banking stocks are made equal.

There are investment banks, like Goldman Sachs Group Inc. (NYSE: GS), and then there are commercial banks, like Wells Fargo & Co. (NYSE: WFC). While commercial banks are less exposed to the business cycle, as they rely on a more predictable—and less volatile—stream of revenue and income through consumers, investment banks can offer the most upside during a cycle boom; however, they are also riskier ones during a slowdown.

To get the best of both worlds, growth and protection, investors can look into banks like JPMorgan Chase & Co. (NYSE: JPM), which are diversified into investment and commercial banking businesses. While the bank’s stock is trading near a new all-time high, investors will have a new reason to justify a higher ceiling, especially after the first quarterly earnings results.

JPMorgan Stock: Consumers vs. Corporates—Who's Driving Profits?

Understanding which segment brought the most profit to the bank will help investors better understand today’s economy. The numbers will tell a different story than most mainstream media narratives in the market today.

When breaking down the investor presentation for JPMorgan’s second-quarter 2024 earnings results, investors will notice a widening gap between the investment banking side of JPMorgan and its commercial side, starting with revenues.

Consumer banking revenues rose by only 3%, which doesn’t keep up with inflation during the year. At the same time, business costs increased by 13% as the bank decided to reinvest more capital into technological advancements and user experience improvements, a sign of a slower cycle for consumer banking.

That makes sense, considering consumers today are more worried about inflation, and credit card delinquencies have risen to levels not seen since 2011. To reiterate this trend, investors will notice that net charge-offs increased massively by $813 million to reach $2.1 billion.

The rise in charge-offs is driven mainly by credit cards, which investors can blame on rising delinquency rates. The numbers don’t support a healthy consumer economy, which is why stocks like Nike Inc. (NYSE: NKE) and Starbucks Co. (NASDAQ: SBUX) are selling off to near their 52-week low prices today.

On the other hand, the corporate world is doing just fine. Investment banking revenue jumped by 46% over the year to reach $2.5 billion. The translation from this activity is that, as the prospects of interest rate cuts approach the market, which could be here by September 2024, according to the CME’s FedWatch tool, more corporate activity will result.

Investors can take this as a sign to lean on the increased certainty of interest rate cuts since investment banking activity is highly dependent on the business cycle and, therefore, on interest rates. The bank’s equity market revenue has reached $3 billion, a 21% increase over the year, a trend no one expected.

With a low volatility index (VIX), it is hard to profit in equity markets, as traders need volatility to make money. The details suggest that the bank used derivatives like options and other leveraged products to make this happen in a low-volatility environment.

Record Profits at JPMorgan Don’t Mean Record Sentiment

Healthy banking earnings, including a record profit for JPMorgan, are typically encouraging signs for an economy. However, the devil lies in the details this time, as some diverging trends would err on the side of caution for those willing to look deeper.

While investment banking revenues may suggest a healthy rebound in the business cycle, it doesn’t make sense to see that activity happen before rate cuts are here, especially in the middle of the interest rate peak. This could be a sign of risk reduction, making deals to diversify, or financing equity and debt instruments to prepare for a potentially bumpy road ahead.

The rising net charge-offs in credit cards aren’t encouraging either since they point to a weakening economic consumer structure. More than that, JPMorgan increased its net reserve allowance from $545 million in 2023 to $579 million this quarter, a war chest exclusively dedicated to cushioning any further write-offs in delinquent consumer credit.

These trends, which diverge into the future for a potentially bearish scenario, may have driven Wall Street analysts to forecast only 0.2% earnings per share (EPS) growth for the bank. This explains why the consensus price target of $198.6 a share today would call for the stock to fall by 4.3% from where it trades today.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.