Federal Reserve interest rates, which influence global lending rates, are at their highest in 23 years, but JPMorgan's commercial banking clients remain optimistic.
In a survey of more than 100 founders and senior executives from companies with revenues of $2 billion each, more than 90% said they were neutral to optimistic about the U.S. economy over the next 12 months.
The survey is not an anomaly, and the responses are indicative of broader trends in the bank's commercial banking business, Ginger Chambless, head of commercial banking research at JPMorgan, told Fortune in an interview on Monday. Survey respondents cited expected market expansion, new product introductions and plans to adopt AI as the three main factors driving their optimistic outlook.
“What they're seeing on the ground makes them optimistic about their growth trajectory and their revenue and profit prospects,” Chambless says, “and that's really the goal for these business leaders.”
JPMorgan's commercial banking business generated $15.5 billion in revenue last year, up 35% from the prior year, and is projected to post $3.9 billion in the first quarter of 2024, up 12.5% from the same quarter in 2023. (JPMorgan's second-quarter earnings are scheduled to be released on Friday.)
Despite citing several business concerns, 28% of respondents expect current market expansion to grow over the next 12 months, 26% have new product launches in the pipeline, and 25% plan to adopt or expand their use of AI.
Chambless said consumers, businesses and markets have all handled the recent high inflation rate of 9.1% better than expected, and a “tightening labor market” has given them the luxury of being more proactive. Specifically, mid-sized commercial businesses appear to be more willing to try new things and accept that they are increasingly on the way to a soft landing from record high inflation, which rose back up to 3.3% after dropping to 3.1% in January.
While high interest rates tend to reduce mergers and acquisitions, 34% of leaders surveyed said they plan to do M&A in the next 12 months. As interest rates have risen over the past two years, M&A deals have fallen 32% from record highs, according to the Mergers, Acquisitions & Partnerships Association. With at least one rate cut expected this year and more to come, founders are likely looking to close a number of deals that have been “stuck” because interest rates remained high, according to Chambless.
Reasons for optimism
The overall positive outlook is surprising for a few reasons. First, a similar JPMorgan poll conducted in January found that only 67% of business leaders had a neutral or optimistic outlook for 2024. This optimism comes in the face of numerous, and no small, concerns: 33% of leaders said they were concerned about the impact of interest rates on the cost of debt; the effective federal funds rate is currently at 5.33%, the lowest since February 2001, when it was 5.49%; and 25% cited geopolitical conflict as a reason.
Eighteen percent of respondents said they plan to add employees over the next 12 months, which falls firmly into the “it all depends” category. “We're still seeing direction as mid-size business leaders look to maintain or expand their workforces,” Chambless said. “This is a sign of optimism about the outlook and growth plans, and we see mid-size businesses continuing to be very resilient.”On Friday, the Bureau of Labor Statistics reported that nonfarm payrolls increased by 206,000 last month, but the unemployment rate remained at 4.1%.
Despite respondents' optimism, uncertainty remains higher than normal, Chambliss said. “We think the best thing for mid-sized companies, and maybe businesses in general, is to seize opportunities to de-risk their exposure. Whether it's interest rates or commodity prices, de-risking is something that really benefits companies in a lot of ways and allows them to focus on the fundamental aspects of their business.”
The survey was conducted at JPMorgan's ninth annual Founders Forum in New York City last month. The event brought together 160 founders and business leaders running companies with annual revenues between $20 million and $2 billion across industries including technology, retail, food and beverage and healthcare. 115 people participated in the survey.
Subscribe to our CEO Daily newsletter to get global CEO perspectives on the biggest stories in business. Sign up for free.
Source link