Earnings Season Kicks Off! With Two Major Boosts, Can U.S. Banks Start Strong?

How financial institutions view the second half’s economy and inflation is under scrutiny.  

 

Local time Tuesday, the new U.S. earnings season will officially kick off with JPMorgan, Wells Fargo, and Citi releasing results.  

 

FactSet Research predicts a 4.8% earnings growth rate for S&P 500 companies in Q2, the lowest since Q4 2023.

 

Market concerns over tariff uncertainties, which could further impact corporate performance, are rising. As a key economic barometer, financial institutions’ outlook on the future will draw more attention.  

Trading and Investment Banking Shine  

Driven by active trading and a mild rebound in investment banking, the market widely expects U.S. major banks’ profit growth to exceed forecasts.  

 

Since April, U.S. stock market IPOs and mergers have rebounded, signaling a warming investment banking sector in the latter half of Q2, with traders growing more optimistic about the rest of the year.

Previously, escalating trade wars and geopolitical tensions had pushed U.S. corporate M&A activity to a 20-year low.

 

Morgan Stanley banking analyst Betsy Graseck wrote in a report last week: “We expect major banks’ investment banking revenue to beat forecasts in Q2, with management teams increasing investments.”  

 

Meanwhile, trading revenue is set to rise amid market volatility. Bank of America and Citi executives said last month they expect market revenue to grow 5%-10% in Q2.

 

Goldman Sachs stated: “Given the uncertainty in macroeconomic and geopolitical contexts, we continue to expect trading revenue to remain robust in the near future.”  

 

A key revenue driver, net interest income (NII) growth is projected at around 5%. With resilient consumer and corporate finances, potential loan loss provisions for financial institutions are expected to remain limited.

 

Analysts note that credit quality for consumer and commercial borrowers remained strong in Q2, despite weak loan demand, which has started to improve. “One of the biggest questions is: How sustainable is this loan growth?” Wells Fargo wrote.  

 

In the recent Federal Reserve stress tests, major financial institutions performed well, demonstrating sufficient capital to weather potential adverse scenarios.

After banks raised dividends and announced stock buyback plans, investors may closely scrutinize how banks deploy their capital.  

 

Future regulatory policy benefits are set to continue. In June, Federal Reserve Governor Michelle Bowman’s nomination was approved by the Senate to serve as the Fed’s vice chair for supervision, further signaling a shift toward looser financial regulation under President Trump’s term.

 

Bowman had previously told Congress that current regulations are “overly complex and redundant,” promising to “reform regulatory focus, restore tailored supervision, promote bank innovation, and enhance transparency” if appointed.  

Headwinds and Highlights  

In the second half, potential headwinds for financial institutions stem mainly from economic slowdown pressures on businesses and consumers.

 

Key pain points include tariff-related inflation concerns, worsening U.S. fiscal outlook, a sluggish real estate market, weak consumer credit, and geopolitical turmoil.

 

IPO and M&A markets showed some vitality in June but remain far below their peaks a few years ago.  

Investors may also want to learn about the latest credit deployment updates, a critical factor in driving economic growth.

 

Despite volatility in stock and bond markets, corporate credit spreads measuring borrowing costs have remained relatively stable and low over the past few months.

 

If institutions sense recession pressure, they might limit lending, potentially widening the spread between corporate bond yields and the 10-year U.S. Treasury yield.  

 

On a more positive note, rising long-term Treasury yields seem to favor the industry, as net interest income (a main profit source for banks) benefits.

 

While yield increases partly reflect concerns over U.S. debt and tariffs, the steepening yield curve also signals hope for U.S. economic growth, allowing banks to lend at higher rates than they borrow. This typically boosts industry profitability.  

 

However, JPMorgan CEO Jamie Dimon sounded a warning in late May, alerting investors to potential cracks in the bond market. He also warned of possible stagflation in the U.S. Meanwhile, the Fed’s June economic forecast heightened concerns about stagflation.  

Thus, U.S. major banks’ earnings calls provide investors with critical insights into the economic outlook.

 

For instance, on net interest income, rate cuts often affect the short end of the yield curve, but concerns over tariffs and fiscal budgets keep long-term rates elevated. This allows banks to borrow at relatively low rates and lend at higher rates, benefiting their margins.

 

Last quarter, several major banks, including JPMorgan, expressed hesitation in predicting NII paths given the many economic uncertainties at the time.  

 

Additionally, views on recession and inflation deserve attention. As trade tensions ease, U.S. consumer confidence began improving in May and June.

 

Dimon, speaking at the Morgan Stanley U.S. Financials Conference on June 10, said: “U.S. households have money, with decent wages and unemployment rates. Among high-end consumers, they’re still traveling and spending.”

 

He noted that if 10-year Treasury yields rise above 5%, it would pressure all sides. This ties to future inflation paths, and bank executives may be asked about their inflation views, the potential impact of tariffs on prices, and any price hike plans they’ve heard from clients.