First-quarter financials earnings growth finished mid-pack, and the second quarter doesn't look much brighter for this influential sector. In fact, it could dim, setting the stage for an earnings season with lots to prove.
Big banks like JPMorgan Chase (JPM), Bank of America (BAC), and Goldman Sachs (GS) tend to report bright and early positive surprises quarter after quarter, often helping improve market sentiment before other sectors get out of bed. They might do that again when they and other banks report Tuesday and Wednesday, considering a favorable trend in the yield curve that could improve profit margins.
Overall, though, analysts expect second-quarter S&P 500 financials sector earnings to grow just 2.9%, well below the 5.5% they penciled in back on March 31 and short of 7.1% first-quarter growth, according to the latest FactSet report. The financials sector includes many smaller banks, brokerages, insurance companies, and payment firms, so it shouldn't be painted with one brush. Big banks have an advantage and typically get the lion's share of attention. Recent signs of life in initial public offerings (IPOs) and market volatility that likely helped support trading volume could both work in the banks' favor even if the overall financials sector doesn't impress.
Headwinds for banks include consumer and corporate reticence amid signs of slowing economic activity. In addition, tariff-related inflation concerns, a worsening U.S. fiscal outlook, a lackluster housing market, relatively high borrowing costs, weaker consumer credit, and geopolitical turbulence are sore spots. The IPO and M&A markets flashed some life in June but remain well below peaks of a few years ago, and banks face increasing competition from private markets for services they once provided.
Investors might also want the latest word on 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.
However, that's the opposite of what's happening. High-yield spreads dropped 150 basis points by late June from early April.
"Even though default rates remain elevated and corporate fundamentals appear to be weakening, corporate bond investors don't seem to care," said Collin Martin, director, fixed income strategy at the Schwab Center for Financial Research.
Bank stocks capsized with the rest of the market in early April after President Trump's first announcement of "reciprocal" tariffs and then rebounded in May. Even so, the S&P financials sector trails the broader market over the last few months and finished dead last among S&P 500 sectors for the month between mid-May and mid-June. During that period, it slid 2.75%, while the S&P 500 climbed nearly 1%. Most of the biggest bank stocks flattened in late spring, perhaps a sign of consolidation after their sizzling late-April to mid-May rallies.
Some of the fade might reflect a weaker U.S. economic picture as well. Jobless claims started climbing in June from near-term lows, and there was slower-than-expected progress on trade deals as deadlines approached. Worries also grew about the budget under debate in Congress, which some economists fear could raise the debt enough to trigger so-called "bond vigilantes" who might drive down demand for Treasuries and send yields skyrocketing.
Influential JPMorgan Chase CEO Jamie Dimon sounded the alarm in late May, warning that investors could see "a crack in the bond market." He also warned of possible stagflation, a trend in which economic growth slumps and unemployment rises even as inflation heats up. The Federal Reserve's June economic projections reinforced stagflation fear. The central bank raised its year-end inflation and unemployment estimates from March.
On a more positive note, net-interest income—a major source of banking profit—seems to be moving in the industry's favor as longer-term Treasury yields rise. While some of the yield gains reflect concerns about U.S. debt and tariffs, a steepening yield curve can also reflect hopes for economic growth and allows banks to lend money at higher rates than they borrow. This typically aids their profit margins.
Earnings calls offer investors a chance to hear straight from bank executives on tariff policy, the budget under debate in Congress, and the potential impact of these and other events on consumer, investor, and corporate demand for banking services.
Tariff policy is likely high on the list of topics, and banks don't know any more than the rest of us as to what the policy will ultimately be or when it will take effect. In the meantime, tariffs have driven uncertainty, potentially weighing on demand for banking services this quarter as many companies wait for more concrete government policy before making investments.
"Tariffs are the big driver of uncertainty," said Michael Townsend, managing director, legislative and regulatory affairs at Schwab. "Companies can't plan if they aren't sure whether tariffs imposed today will be modified or delayed next week or next month. How can a business decide whether to upgrade equipment or hire a new employee if they don't know what the demand for their products will be in the months ahead?"
On the plus side, tariff uncertainty drove market volatility over the last quarter as major indexes and the bond market took a roller-coaster ride, possibly raising trading volumes for banks with major markets businesses like JPM. That company saw markets' revenue rise 21% year over year in the first quarter. Bank of America said the first quarter brought it the highest sales and trading revenue in over a decade.
As always, watch each institution's general level of loan activity and the quality of their existing loans, which could be illuminating considering the period from April through June coincided with initial tariff threats, tariff extensions, and the budget showdown in Washington, D.C. During these volatile months, borrowing costs didn't appreciably decline, though they didn't rise much either. They're still much higher than many expected them to be a year ago when the Fed began lowering rates, however.
Borrowing rates consistently in the 4.5% to 5% range might have made things difficult in the second quarter, especially for smaller regional banks reporting in coming weeks with more exposure to smaller corporate borrowers and consumers. It also might be a challenge for bigger banks known for their consumer businesses like Wells Fargo (WFC) and Bank of America.
Industry-related developments could also get attention. Big banks recently underwent annual stress tests from the Fed to see if they could maintain adequate capital resources in the event of sudden downturns in the economy. Banks that pass the tests are then allowed to announce share repurchase plans and raise dividends. These plans could be announced as part of earnings.
Another issue important to banks is the so-called "leverage ratio requirement" that affects how much lenders can trade in the $29 trillion U.S. Treasuries market. The Fed board recently voted to reduce the capital requirement—which limits banks' ability to hold Treasuries—to a range of 3.5% to 4.5% from the current 5%, Bloomberg reported recently. Some economists think a lower requirement might allow banks to participate more in the Treasuries market, perhaps putting additional pressure on yields. Bank executives may discuss this in their calls and give more color on what a relaxed requirement might mean for their Treasury strategies.
Here are three additional things to watch as big banks report, starting with JPM, Wells Fargo, and Citigroup © on Tuesday, July 15. They're followed on Wednesday July 16 by Goldman Sachs, Bank of America, and Morgan Stanley (MS).
1. How is investment banking activity shaping up?
Despite all the tariffs, U.S. budget, and geopolitical uncertainty, the IPO and mergers and acquisitions markets have shown some life the last two months. Even so, Bank of America CEO Brian Moynihan said last month that the company's investment banking fees are likely to fall to about $1.2 billion in the second quarter from $1.6 billion a year earlier, Reuters reported. That is "not where we want to be, but great prospects, great conversations," Moynihan said. Some of the more high-profile IPOs recently have been cryptocurrency companies, but Barron's recently reported that Holtec International, a nuclear power industry company, could go public within several months. A rising tide of IPOs across multiple industries would likely be welcome news for market sentiment in general as well as bank earnings prospects.
2. What's the impact of net-interest income, and where is it headed?
The key net-interest income (NII) metric measures how much banks make lending minus what they pay to customers. For now, it looks positive if you're a big bank, with the credit spread rising as rates on longer-term bonds climb, while short-term rates remain relatively low on rate cut hopes. The Fed's last meeting in mid-June kept two possible rate cuts in the picture, though two high-profile Fed policymakers recently said they could be open to a 25-basis-point cut as soon as July. Rate cuts tend to affect the "shorter" end of the yield curve but worries about tariffs and the budget have kept long-term rates higher. That gives banks the ability to borrow money at relatively low rates and lend it at relatively high ones, which is good for their profit margins. Last quarter on their earnings calls, some big banks, including JPMorgan Chase, told analysts they were hesitant predicting the NII path considering so much economic uncertainty at the time. JPMorgan Chase promised analysts "more color on that" this coming quarter. Bank of America has said NII will rise to between $15.5 billion and $15.7 billion by the fourth quarter, from $14.5 billion in the first quarter. "We feel good about that," CEO Moynihan said in reiterating that forecast last month at an industry conference. "This will be another quarter of growth."
3. Do bank leaders see a recession, inflation ahead?
Consumer sentiment hit the skids in April and started to improve in May and June. The question is whether that was a brief rebound or something with more traction. "The consumer—they have money," said JPMorgan Chase's Dimon, speaking at the Morgan Stanley U.S. Financials Conference on June 10. "Wages are pretty good. Unemployment's pretty good…and at the upper end of the consumer, they're still doing travel and spending some money." On the other hand, Dimon said if 10-year yields rise to 5% or above, it "puts a lot of stress on people. And as a business, my view is you should always be prepared for that." Another stress point is inflation, and the Fed itself seems caught between Fed Chairman Jerome Powell and several other policymakers who don't see the need for rate cuts anytime soon and those who might support one as soon as this month. Bank executives are likely to get asked what their outlooks are for inflation, the potential tariff impact on prices, and what they're hearing from clients about any plans to raise prices.
For the major banks reporting, analysts expect the following:
JPM: EPS of $4.48, –27% from a year earlier, on revenue of $43.98billion, –12.38% year over year
WFC: EPS of $1.40, +5,2% from a year earlier, on revenue of $20.76 billion, +0.36% year over year
MS: EPS of $2.01, +10.1% from a year ago, on revenue of $16.04 billion, +6.8% year over year
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