Major U.S. financial institutions enter their third-quarter earnings cycle after one of their most profitable six-month runs in at least a decade, facing immediate pressure from a sharp rise in long-term interest rates. As reporting kicks off, investors are scrutinizing whether higher borrowing costs and surging deposit funding expenses will undermine profitability across Wall Street.
The Bottom Line
- Earnings Outlook: Analysts project third-quarter profits for major banks will be impacted by cooling trading activity and rising funding costs.
- Yield Pressures Mount: A dramatic rise in long-term bond yields has erased roughly $270 billion in market value across five major lenders from their respective summer highs through Friday’s close.
- Funding Cost Headwinds: Competition for customer cash and the interest rate environment are squeezing margins and driving up deposit costs.
Trading Desks Face a Slowdown After Spring Surge
When JPMorgan Chase (NYSE: JPM), Goldman Sachs (NYSE: GS), and Citigroup (NYSE: C) report earnings, markets will receive data on how fixed-income and equity desks performed during the third quarter. The five largest U.S. banks are projected to bring in roughly $19 billion or slightly more from fixed-income markets revenue this quarter, marking a decline from the over $21 billion recorded in the second quarter. This retreat follows a first half of the year that was one of the most profitable six-month runs in at least a decade.
The performance gap between individual firms is widening significantly. While equity trading revenue is expected to approach $19 billion industry-wide, fixed-income operations are bearing the immediate brunt of shifting macroeconomic conditions. Goldman Sachs is expected to lead equity trading revenue with $5.1 billion, followed closely by Morgan Stanley (NYSE: MS) at $4.9 billion, JPMorgan at $4.5 billion, and Bank of America (NYSE: BAC) at $2.6 billion.
| Bank Ticker | Projected Equity Trading Revenue | Recent Stock Trend |
|---|---|---|
| GS | $5.1 Billion | Strength in bond issuance and trading |
| MS | $4.9 Billion | Growing wealth management business |
| JPM | $4.5 Billion | Priced for near-perfect execution |
| BAC | $2.6 Billion | Reporting Wednesday |
Higher Borrowing Costs Complicate Dealmaking and Valuation Hurdles
The rapid repricing of long-term debt is altering corporate finance dynamics. Despite macroeconomic hurdles, advisory pipelines tied to long-term infrastructure remain active. Guillermo Baygual, Citigroup’s global co-head of M&A, noted that as a topic in the boardroom, M&A hasn’t slowed down. At the same time, broader investor sentiment has soured. According to Erika Najarian, an analyst at UBS, who shared her perspective with clients, the steep climb in long-term rates has been the primary catalyst behind the recent weakness in bank shares. Data from a Truist Securities poll highlighted this widespread apprehension, revealing that a mere 35% of institutional participants anticipate bank equities will outperform the broader market, a sharp drop from 68% in July and 82% in December.
Deposit Competition and Margin Pressures Ahead of Fed Decisions
Beyond capital markets, bank executives must address how rising deposit and wholesale funding costs impact net interest margins. Citizens Financial Group (CFG) President Brendan Coughlin noted the focus is on risks rather than what’s happening out the window. Market watchers are also monitoring broader economic indicators released concurrently with bank earnings, including consumer price index data. While credit quality across major loan portfolios shows no signs of deterioration so far, with most banks having shortened portfolio durations and reduced sensitivity to rate movements, the speed of the shift in bond yields continues to color near-term market outlooks across the financial sector.
Disclaimer: The information provided in this article is for educational and informational purposes only and does not constitute financial advice.
