Wall Street Banks Face Rate Test After Blockbuster First Half as Q3 Earnings Near

Wall Street’s biggest banks closed out one of their most profitable six-month stretches in at least a decade, but a sharp climb in interest rates now clouds the outlook. Third quarter earnings begin Tuesday with JPMorgan Chase, Goldman Sachs and Citigroup, followed by Bank of America and Morgan Stanley on Wednesday. Analyst estimates compiled by Bloomberg point to lower profits than the second quarter as trading, dealmaking and financing revenue cool. Most banks should still report gains from a year ago, though Bank of America and Morgan Stanley are expected to be exceptions.

Bank Stocks Lose $270 Billion in Market Value

Investor mood has turned. The five banks have collectively lost about $270 billion in market value from their summer highs, while the S&P 500 is up roughly 14% this year. A Truist survey found only 35% of institutional investors expect bank stocks to beat the market, down from 68% in July and 82% in December. UBS analyst Erika Najarian blamed much of the weakness on the steep rise in long-term rates.

How Higher Interest Rates Affect Banks

Rising rates can lift lending income at first, but they also raise funding costs, pressure bond portfolios and complicate dealmaking. Macquarie strategists noted that many big financial blowups followed abrupt jumps in long-term yields.

Trading Revenue in Focus

Trading results should show the earliest signs of a slowdown. In September, executives hinted at softer activity, especially in fixed income. Citizens Financial Group’s Brendan Coughlin said the concern is more about risks than current conditions.