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What JPMorgan signals about the stock market for now

JPMorgan Chase's solid second-quarter earnings beat may signal improved health for beaten-down financials and send stocks further into record territory in the near term.

"This is extremely bullish. This is the one sector we needed to support the market," said Marc Chaikin, CEO of Chaikin Analytics. With the bank's earnings report, he expects the S&P 500 to rise as high as 2,200 or 2,250.

The financials sector was down more than 2 percent for the year as of Wednesday's close, the only S&P 500 major industry sector in the red. Analysts had generally lowered expectations for bank earnings this quarter as low global growth, the Brexit vote and central bank easing was likely to pressure profit margins.

Jamie Dimon
Victor J. Blue | Bloomberg | Getty Images
Jamie Dimon

While JPMorgan set a positive tone for the bank reporting season, concerns about Brexit remain as the U.K. slowly navigates its departure from the European Union, and interest rates stay low.

"You still have potential for fallout from Brexit, if it happens," Chaikin said.

One weight hanging over the financials has been the weakness in the energy sector, given the loan exposure of banks. Jeremy Klein, chief market strategist at FBN Securities, points out that oil has fallen from $50 a barrel to trade near $45 a barrel despite record highs in U.S. stocks. That "could be a potential problem for earnings expectations for 2017," said Klein.

He is neutral on the stock market, which he said has risen more on positive sentiment on central bank easing rather than improvement in earnings to support historically high valuations.

JPMorgan set a positive tone for the bank reporting season on Thursday with earnings that beat on both the top and bottom line at $1.55 a share on revenue of $25.2 billion. The stock was more than 2 percent higher in late morning trade. Shares were 8.5 percent lower year over year as of Wednesday's close.

"The banks have been living with lower for longer interest rates for a long time," David Hilder, Drexel Hamilton senior equity analyst, said on CNBC. "They're continuing to bring down expenses. JPMorgan actually showed that their expenses in the investment bank were down about 1 percent year over year. So I think the banks led by JPMorgan have really built themselves, arranged themselves for the current economic environment, and if the market and economic environment is better, then they will have some earnings leverage to that."

Hilder said JPMorgan reported a "very high quality quarter," with trading revenues better than expected, up 23 percent year over year. Fixed income trading revenue was up 35 percent, while that from equities was 2 percent higher. He also noted the firm built reserves for loan losses of $300 million for the quarter.

After the earnings report, S&P Global raised its 12-month price target on the stock by $3 to $70 a share based on higher-than-expected loan growth of 10.3 percent year over year, strong fixed-income trading and "unusually" low expenses. The firm maintained its buy rating on the stock.

After JPMorgan's beat and BlackRock's in-line quarterly report on Thursday morning, the Financial Select Sector SPDR ETF (XLF) traded 1 percent higher Thursday.

"The financials are a big component in the S&P on a percentage basis. Typically a rally without the financials is viewed with suspicion," Chaikin said. "Weakness somewhere in the U.S. economy or somewhere in the world economy is reflected in the financial stocks. … These are stocks that should be going up when people feel positive about the economy, positive affirmation people feel the market is in strong hands."

Especially troubling to some has been the rally in safety stocks like utilities and telecoms, which are currently market leaders. The buying in those sectors more reflects the hunt for yield rather than a healthy economy. For that reason, overall market sentiment would be helped by a winning spree in financial stocks.

Wells Fargo and Citigroup are among the financial firms set to report earnings Friday morning. Analysts polled by Reuters expect Wells Fargo to post second-quarter earnings of $1.01 a share on revenue of $22.17 billion. Citi is expected to report earnings of $1.10 a share on revenue of about $17.47 billion.

"Wells Fargo is more reliant on mortgages than JPMorgan is for a lot of their earnings," said JJ Kinahan, chief strategist at TDAmeritrade. "It will be interesting to see how the loan market has done."

"Loans will be a very positive sign for the economy because (it means) people still believe their jobs are going well, they have more confidence in the economy," he said.

Similarly, he's watching Citi earnings for indications on their credit card business, as well as the impact on their international operations from recent global market turmoil.

Major financial stocks traded about 2 percent higher in morning trade Thursday. Citigroup and Morgan Stanley were up more than 2 percent, while Wells Fargo rose 1 percent. Goldman Sachs, Bank of America and Charles Schwab traded about 1.5 percent higher or more.

Bank of America and Charles Schwab are scheduled to report earnings ahead of the open Monday. Goldman Sachs is set to post results Tuesday and Morgan Stanley reports Wednesday.

U.S. stocks were about half a percent higher or more in morning trade Thursday, with the S&P 500 and Dow Jones industrial average both setting fresh all-time intraday highs as financial stocks led. The S&P closed at a record for a third-straight day Wednesday at 2,152.43, with utilities leading.

Over 14 instances since 2011, the S&P 500 has had a median return of 1.35 percent five trading days after JPMorgan earnings beat by at least 1 cent, according to Kensho , a quantitative analytics software used by hedge funds. The index had positive trades 61.4 percent of the time.

The same analysis showed XLF, the financials sector ETF, has a median return of 1.51 percent with positive trades 58.6 percent of the time.

Disclosure: CNBC's parent NBCUniversal is a minority stakeholder in Kensho.