- The KBW Bank Index has fallen more than 10% since mid-August, meeting the definition of a correction, and is coming off its worst quarter since early 2023, when a prior episode of rising yields helped trigger a regional banking crisis. Citigroup, Goldman Sachs, JPMorgan and Wells Fargo report Tuesday, with Bank of America and Morgan Stanley following Wednesday.
- Expectations are solid on the surface. The largest banks are forecast to post a quarterly stock-trading haul of nearly $19 billion, with lending rising year over year and credit quality expected to hold steady. Jefferies, reporting early last month, said its investment bank and equity trading desk had a record quarter with other metrics mixed.
- The credit assumption is the one worth questioning. Federal Reserve survey data released last week showed 8.6% of families carrying payment-to-income ratios above 40%, the largest share since 2010, while consumer sentiment’s current conditions gauge hit an all-time low, mortgage rates reached 7.28% and auto loans reprice against five-year yields above 5%.
- Options positioning leaned bullish into the print, with demand for JPMorgan calls paying out on a 10% move exceeding appetite for protection against a 10% drop, and more calls than puts outstanding.
What Happened?
Matt Miskin of Manulife John Hancock Investments said banks have been stung by bond volatility while facing climbing rates on credit card, auto and home loans, noting that higher yields can improve revenues but can also reach a tipping point where consumers cannot pay. Mike Mayo at Wells Fargo argued elections could dent deregulation without derailing it and expected the AI scare trade to reverse on results because trust at banks is a moat for deposits. Morgan Stanley’s Manan Gosalia called the selloff an attractive entry point for positioning into a stronger 2027. CIBC Capital Markets strategist Christopher Harvey expects executives to sound more cautious on consumer health than a few months ago, anticipates a relief rally because lagging banks typically bounce after earnings, and said he would use any pop to reduce exposure, preferring communication services and utilities. JPMorgan analysts have suggested a surprise Republican sweep at the midterms could favour lenders including Bank of America, Citigroup and Wells Fargo on lighter oversight, though polls show Republicans losing ground.
Why It Matters?
Trading revenue near $19 billion will take care of itself and tells you little. The commentary on consumer credit is where this earnings season is decided, and the consensus expectation that credit quality holds steady sits awkwardly against the data of the past fortnight. The Federal Reserve’s own triennial survey found the highest share of households with payment burdens above 40% of income since the aftermath of the financial crisis, pandemic savings are exhausted, and the sentiment survey recorded its weakest reading on current conditions ever. Harvey’s expectation that executives sound more cautious is the most useful prediction in the article, and it is the tone rather than the numbers that will move the shares. Miskin frames the mechanism correctly and the sequence matters. Higher rates lift revenue on the asset side immediately and produce credit losses later, so a quarter can look strong precisely while the conditions for the next one deteriorate. That lag is why bank earnings during a tightening cycle are a poor guide to what follows. The 2023 comparison deserves care rather than alarm. Bloomberg draws it directly, and the mechanism is similar in that securities portfolios are marked against rising yields while deposit costs climb. The differences are real: these are the largest institutions rather than regionals, and the yield move has been gradual rather than sudden, which is the variable that broke Silicon Valley Bank. Mortgage securities have nonetheless just recorded their second-worst year in a 50-year index history, and banks are a primary holder. The analyst split is itself informative. Mayo is bullish, Gosalia calls it an entry point, and Harvey expects a bounce he would sell into. Three professionals looking at the same sector reach three different trades, which is a reasonable signal that the outcome genuinely depends on what management says this week.
What Next?
Tuesday brings Citigroup, Goldman Sachs, JPMorgan and Wells Fargo, with Bank of America and Morgan Stanley on Wednesday. Listen for provisions, charge-off guidance and any change in language on consumer health rather than headline trading figures. Consumer price data on October 14 lands between the two reporting days, and the Federal Reserve meets October 27 and 28 with a hike fully priced by year end. The November midterms are the policy variable analysts are positioning around, and current polling runs against the deregulation trade. For anyone considering the entry point Gosalia describes, Harvey’s counsel to sell into a relief rally is the opposing view worth weighing.
Affected Tickers and Coins: JPM, C, GS, WFC, BAC, MS, JEF
Source: Bloomberg
