Warren Buffett Shuns Investment Banks, Embraces Wells Fargo

JPMorgan, like Goldman Sachs is undoubtedly a leader in investment banking, with a top three position in most key merger advisory and debt and equity underwriting markets. Still, a near 30% year-over-year lull in those businesses means that even top brands aren't expected to post strong earnings. In fact, it's the counterintuitive accounting gains that investment banks may post on the falling value of their debt after Moody's slashed sector ratings that may be among the biggest positive surprises in second quarter earnings.

Although many like JPMorgan chief executive Jamie Dimon expect that investment banking revenues will have a big comeback as companies enter a cycle of mergers and IPOs that was postponed by the European debt crisis and political gridlock in Washington, some think the industry's woes may be lasting.

"We think the slowdown in capital markets revenues is more structural than cyclical," wrote Standard & Poor's credit analyst Richard Barnes in a July 2 note that outlined why the ratings agency sees new regulations, high expense and lasting macroeconomic risks as reason to question whether investment banks will even be able to out return their cost of capital in coming quarters and years.

The prospect of trading losses like those booked by JPMorgan and added political and regulatory pressures on the heels of a $450 million fine that Barclays paid to U.S. and U.K regulators for its manipulation of short-term interest rates, and which cost CEO Bob Diamond his job, suggest added risks. Meanwhile, S&P's outlook for investment banks is similar to what drove Moody's to cut ratings in June.

As it turns out, it's Buffett plays like Wells Fargo and U.S. Bancorp that remain a source of financial sector strength headed into second quarter earnings, which are likely to be relatively disappointing. On Thursday, Credit Suisse analyst Moshe Orenbuch cut his earnings estimates for JPMorgan, Citigroup and Bank of America because of their sensitivity to the weakness of capital markets. Among large cap banks, Orenbuch left his earnings estimates for Wells and U.S Bancorp unchanged, while noting that throughout the industry, weaker capital markets revenue may be offset by loan growth and cost cuts.