Q3 Bank Earnings Preview: Profit Path Uncertain

Big banks kick off third-quarter earnings season on Tuesday with a solid 2025 track record. The steeper yield curve and a heavy dose of summer investment banking activity suggest global U.S. banks remain on solid footing but face possible challenges. One of which is how to follow up a second quarter where sweeping market volatility sent Wall Street trading demand soaring, much to the big banks' benefit.

"After a strong post tariff-tantrum rally that lasted through the summer, performance has stalled over the last month with the S&P financials sector being one of the worst performing over that time period," said Alex Coffey, senior trading and derivatives strategist at Schwab. "While this could be tied to uncertainty around macroeconomic trajectory and monetary policy, it is more likely due to many of the big banks seeing a short-term peak in earnings growth last quarter and a notable deceleration expected in the coming quarters."

One factor behind the possible earnings deceleration could be Federal Reserve policy because expected rate cuts can dent banks' profitability. Banks also face tough comparisons to past earnings results, which could slow profit growth year over year in the coming quarters. But during the third quarter, the sector seemed to be in a sweet spot of relatively high rates and an improved climate for investment banking that could likely support earnings for companies most exposed to initial public offerings (IPOs) and mergers and acquisitions (M&As).

Banks often profit most when they can borrow at low rates and lend at higher ones, and that's exactly what the current Treasury yield curve allows. Long-term rates now hold a solid premium to short-term ones, a scenario that provided strong momentum for bank shares since the April "Liberation Day" market dive. Momentum slowed slightly in the third quarter, but the Nasdaq Bank Index (BANK) still rose 3%. 

Last month's rate cut kept pressure on short-term Treasury note yields, while long-term yields—less influenced by Fed policy—are below summer peaks. Still, the 10-year Treasury note yield remains above 4%, which is relatively high. Falling yields can stimulate more investment banking activity, and the slight drop in yields approaching the Fed meeting possibly accounted for some of the resurgence in IPOs and M&As.

The futures market dials up more rate cuts ahead, but what the market wants and what it ultimately gets aren't always the same. The 10-year Treasury note yield rose 100 basis points from its lows a year ago as the Fed cut rates—not necessarily what investors had expected. Yields initially rose again in September after the first rate cut of 2025. The flip side of a steeper yield curve for banks is the negative impact it can have on consumer borrowing for mortgages and furniture and on business borrowing for heavy equipment and new manufacturing facilities.

The summer featured record highs for major U.S. indexes and saw M&As and IPOs surge to levels last seen in the post-pandemic go-go year of 2021, when some crypto and tech IPOs soared. 

Investors got a preview of how industry earnings might turn out in late September when Jefferies (JEF) topped analysts' estimates and reported double-digit growth in its investment banking and capital markets businesses. The bank cited a resilient economy, falling rates, and steady business confidence, Briefing.com noted.

Bank executives speaking at recent industry meetings generally sounded positive, though they outlined possible trouble spots ahead. One issue they're concerned about is Fed independence after President Trump threatened to fire Fed Chairman Jerome Powell earlier this year and then fired Fed Governor Lisa Cook, who remains on the Fed's board of governors as she appeals this decision in court.

"I think central bank independence—not just here in the United States but around the world—has served us incredibly well," Goldman Sachs (GS) CEO David Solomon told CNBC in late July. "I think regulation and supervision are different. But with respect to monetary policy, I think central bank independence and Fed independence is very important, and it's something we should fight to preserve."

Another issue that may surface on bank earnings calls is Fed policy and whether the central bank can continue to cut rates. That might be difficult with inflation seemingly stuck near 3% and the U.S. deficit growing, JPMorgan Chase (JPM) CEO Jamie Dimon told media late last month, repeating a warning he's made in the past. The influential CEO—whose words at earnings time often turn into market-moving headlines—also told Fortune he'd like to see a bipartisan effort by Congress to reduce the national deficit, saying tariffs put in place by the Trump administration won't solve the problem.

Speaking of which, bank executives remain concerned about the impact of tariffs on the economy. Many effects from tariffs haven't hit yet, Dimon recently told the Independent, a UK news outlet. If tariffs' impacts are felt over time rather than all at once, it could mean tougher times for the economy. 

"The tariff impact on inflation requires a fine-tooth comb when looking below headline readings," said Liz Ann Sonders, chief investment strategist at Schwab. "Core goods have moved from deflation territory to inflation territory, while there is also some demand destruction kicking in for categories like furniture, clothing, appliances, and sporting goods."

Big banks like JPMorgan Chase, Bank of America (BAC), and Goldman Sachs tend to report positive surprises quarter after quarter, often improving market sentiment. They certainly might do that again, considering the favorable yield curve. But their outlooks and observations about the health of business and consumers can also play into the stock market's response.

Overall, analysts expect third-quarter S&P 500 financials sector earnings to climb a healthy 11.5%, according to the latest FactSet report. That's down from 12.9% second-quarter earnings growth. The financials sector includes many smaller banks, brokerages, insurance companies, and payment firms, but big banks often draw the most focus. Analysts expect banks as a group to post 9% earnings growth. 

Research firm CFRA expects the largest global U.S. banks to beat consensus expectations, benefitting from investor activity in the equity and fixed income markets. Goldman Sachs and Morgan Stanley (MS) have the best track records of beating estimates, CFRA said, and Citigroup (C) is benefitting from streamlining its business, CFRA added. Bank of America and JPMorgan Chase could see "some drag" from their traditional bank areas, according to CFRA, based on moderate loan growth, decelerating net interest income, and reduced fee income from credit card and consumer loan balances.

Possible headwinds include continued consumer and corporate reluctance to borrow and hire in an uncertain tariff climate, a worsening U.S. fiscal outlook, a lackluster housing market, relatively high borrowing costs, and weaker consumer credit. 

Earnings might also provide insight into credit availability, a key factor driving the economy. Corporate credit spreads—which measure the expense of borrowing money—have been relatively stable and low over the last few months despite the ups and downs of the stock and Treasury markets. If banks and other lenders sense a declining economy, they grow more reluctant to lend, and the spread between corporate bond yields and the U.S. 10-year Treasury note yield can climb, making it more expensive and less desirable to borrow. 

"Commercial loan growth appears to remain resilient and will likely continue to bolster regional bank earnings' performance," said Schwab's Coffey.

Earnings calls offer investors a chance to hear straight from bank executives on tariff policy (including if they see a potential impact from a Supreme Court decision expected soon on whether the tariffs are legal), and the potential impact of new tariffs on lumber and pharmaceuticals.

Throughout the year, tariffs have driven uncertainty, potentially weighing on demand for banking services as many companies wait for more concrete government policy before making investments. The recent "no hire, no fire" jobs environment across many industries is one possible effect from the tariffs. On the other hand, consumer spending has been brisk, reflecting a "k" shaped trend that's seen high-end consumers open their wallets thanks in part to the "wealth effect" from rising stock indexes even as lower-end consumers grow reluctant to spend as the jobs climate worsens.

"It may be that higher-income consumers are holding up the economy," said Kathy Jones, chief fixed income strategist at Schwab. "If true, that would likely signal that a significant slowdown isn't likely any time soon. It also would suggest that the Fed is not likely to ease policy as much as the market expects. However, there are signs of stress among lower-income consumers. Used-car sales are slowing, and delinquencies on auto loans are rising. Because lower-income consumers tend to be the most affected by inflation and slower job growth, those trends are worth watching."

As always, each institution's general level of loan activity and the quality of their existing loans could reflect the tariff environment and uncertainty leading up to the government's shutdown crisis earlier this month. Mortgage rates did fall somewhat late in the third quarter, stimulating stronger weekly mortgage demand in September that might translate to business improvement for some banks, especially smaller regional ones more dependent on consumer loans. 

"Another concern is the continued flow of credit away from big public banks to smaller private lenders. On the positive side, corporate bond issuance has been strong lately, which generates revenue for banks," said Collin Martin, director, fixed income strategy at the Schwab Center for Financial Research.

Here are three additional things to watch as big banks report, starting with JPM, Wells Fargo (WFC), Goldman Sachs, and Citigroup before the market opens on Tuesday, October 14. They're followed by Morgan Stanley on Wednesday morning, October 15, and Bank of America on the morning of October 16.

With so much focus on the summer revival of IPOs and M&As and their possible impact on the investment banking side of the financial business, don't overlook capital markets trading activity on Wall Street as a possible profit-driver for big banks in the third quarter. Though the third quarter lacked the second quarter's dramatic tariff-driven volatility, the continued rally in stocks and fresh interest in so-called "meme" names might have helped banks' trading businesses in recent months. So did IPO and merger activity, which tend to trigger market volume and volatility. Worries about a government shutdown and the Fed's latest rate cut likely drew trading interest in fixed income, especially toward the end of the third quarter. 

The key net interest income (NII) metric measures how much banks make lending minus what they pay to customers. The steeper yield curve has helped NII in recent quarters. Net interest income began improving earlier this year and might have remained a positive force in the third quarter. One concern analysts have is that some major banks depend heavily on NII for their profits, and any slip in this measure could hurt quarterly results. Investors also are likely to look for any guidance on future NII from banks, especially in the current climate of possible falling rates.

Another topic on bank CEOs' minds appears to be cryptocurrencies, a change of pace after many ignored or even called out crypto as something to avoid in the past. Dimon once compared crypto to a pet rock, The New York Times recently noted. In August, the newspaper reported that "financial executives are tripping over one another to unveil new plans—including the development of fresh cryptocurrencies under bank umbrellas and loans tied to digital assets." Analysts may ask bank executives how they expect to incorporate crypto into their businesses and what sort of competitive impact they're seeing from the growth in crypto popularity. 

For the major banks reporting, analysts expect the following: 

JPM: EPS of $4.87, +11.4% from a year earlier, on revenue of $45.4 billion, –9.97 % year over year

WFC: EPS of $1.54, +20.3% from a year earlier, on revenue of $21.1 billion, +8.05% year over year

MS: EPS of $2.10, +11.7% from a year ago, on revenue of $16.7 billion, +39% year over year

BAC: EPS of $0.95, +17.3% from a year ago, on revenue of $27.5 billion, +26.6% year over year

GS: EPS of $11, +31% from a year ago, on revenue of $14.1 billion, +55.2% year over year

C: EPS of $1.90, +25.8% from a year ago, on revenue of $21 billion, +42.2% year over year