The stock market correction from March wasn’t just evident in the UK. Markets around the world suffered last month, including in the US. But with a sell-off in the S&P 500, some shares across the pond now look undervalued. Here’s one well-known bank that caught my eye when looking at price-to-earnings (P/E) ratios.
A short-term hit
I’m talking about JP Morgan (NYSE:JPM). The 10% move lower this year carried over some negative sentiment from December last year, when management guided toward higher-than-expected costs of $105bn for 2026. This was put down to heavy investment in AI and expansion initiatives. While those investments may pay off down the road, people tend to punish short-term financial pressures.
On top of that, the geopolitical uncertainty from the conflict in the Middle East hasn’t helped. With the surge in energy prices, there’s some concern it could hamper consumer confidence and spending in the US. This could act to reduce transactional fees for JP Morgan and potentially lead to higher loan defaults if the economy takes a material downturn.
Valuation points
One of the main reasons why I think the stock’s cheap is due to the P/E ratio. At 14.72, it’s well below the S&P 500 average of 23.7. Even though short-term share price movements can push down the ratio, over the long term, this should correct. In order for the ratio to increase, either the stock could increase or earnings could fall. For reference, the stock’s up 37% in the past year.
I also think the drop from the start of the year coud be erased in the coming months. Markets often overreact to rising costs, especially when those are tied to growth. This isn’t a struggling bank trying to cut corners. Instead, it’s a dominant US bank that’s investing aggressively to stay ahead. I don’t see this as a negative for the share price going forward.
Finally, I believe the stock’s cheap because it doesn’t accurately reflect what could happen to interest rates. If the Iran conflict continues, inflation from higher energy prices will likely rise in the US.
To counteract this, US interest rates could rise. This would help boost JP Morgan’s net interest margin (and net interest income). In effect, it could directly act to increase profits this year. I don’t think the share price is anticipating the potential for this to happen.
Direction of travel
Quarterly earnings are due out in less than a week (14 April). I believe these could be a catalyst, especially if costs are well managed and some benefits from AI are already being felt. As a result, it could be a stock to consider adding within the next few weeks.
However, one risk I see is regulatory pressure. As JP Morgan serves a wide variety of clients, the potential for added restrictions on credit cards or capital requirements is high. This could act to hamper revenue growth in the coming years.
Yet despite this, I think the potential rewards still outweigh the concern.
