Wall Street's biggest banks are riding high as earnings season begins

The country’s biggest Wall Street banks are riding high into the third quarter reporting season.

Analysts expect profits among six major banks to climb 6% from the third quarter of last year, according to Bloomberg data.

“It’s been a good environment,” Barclays analyst Jason Goldberg said.

Expectations will be put to the test starting Tuesday morning, when JPMorgan Chase (JPM), Citigroup (C), Goldman Sachs (GS), and Wells Fargo (WFC)kick off the ritual. Bank of America (BAC) and Morgan Stanley (MS) get going on Wednesday.

Revenue from core lending, trading, and the dealmaking divisions is set to climb across the board.

For all but Wells Fargo, which has a smaller and younger Wall Street division, analysts expect investment banking and trading to climb for a seventh quarter straight. “You have markets at all-time highs. A lot of things are going on geopolitically. Interest rates and currency values are moving. It has all been very active,” Goldberg said.

Stocks of Wall Street banks have rallied for most of the year, lifted by a surge in their fee businesses, improved lending margins, and what has so far proved out as a loosening of capital and supervisory requirements from their Beltway regulators.

Through Oct. 10, shares of Citigroup, Goldman Sachs, JPMorgan, and Morgan Stanley have risen between 40% and 23% year to date, outperforming the S&P 500 index (^GSPC) by at least nine percentage points. Wells Fargo and Bank of America have performed roughly in line with the benchmark index.

Three months ago, these same lenders were still shaking off the uncertainty caused by tariffs that began this spring, which had frozen deals and muted corporate borrowing activity.

Meanwhile, global mergers and acquisitions deal volume has since surged past $1 trillion, while IPOs, corporate debt, and syndicated lending have also all picked up, according to Dealogic data.

At a mid-September Barclays conference, senior executives for all these banks struck upbeat tones on dealmaking, the resilience of the US economy, and their own earnings.

“We’ve got a lot of rich dialogue with clients around the globe as they think about how to manage through some of the outcomes from a tariff point of view,” Citigroup CFO Mark Mason said at that event.

“I still very much feel that the consumer is an anchor of strength, I think, in our current economy,” Capital One CEO Richard Fairbank said.

Learn more about high-yield savings accounts, money market accounts, and CD accounts.

Even the expectation of higher expenses in the third quarter isn’t a bad thing, as it turns out. For example, compensation costs are expected to climb at each of these banks, reflecting the ramp-up in investment banking and trading activity.

“We call them good expenses,” JPMorgan commercial and investment bank co-head Doug Petno said at the same conference.

Top bankers, however, have been far less enthusiastic about asset prices.

JPMorgan CEO Jamie Dimon and Goldman Sachs CEO David Solomon have warned of a stock market correction over the next two years. “I’m far more worried than others about a serious market correction,” Dimon said during a BBC interview last Thursday.

Solomon echoed a similar sentiment, telling Bloomberg TV, “I wouldn’t be surprised if in the next 12 to 24 months we see a drawdown with respect to equity markets … given the run we’ve had.”

Other areas of worry: trade, tax, and immigration. And, if prolonged, the current US government shutdown could delay everything from crucial economic data releases to federal lending activity, consumer spending, and IPO approvals.

Two recent US automotive industry bankruptcies have brought some noise to what’s been “a fairly benign credit environment for a while,” Barclays’ Goldberg said.

The circumstances surrounding the bankruptcies of Dallas-based auto dealer Tricolor and Cleveland-based parts supplier First Brands appear specific to those companies. But together they have sparked concern over how investor demand for high-yield debt and less transparent markets can spell disaster.

Fifth Third Bank and JPMorgan Chase have credit line exposure to Tricolor, while Jefferies Financial Group (JEF), UBS (UBS)-backed hedge fund unit O’Connor, and CIT, a unit of First Citizens BancShares (FCNCA), have all been named as creditors in the larger First Brands bankruptcy, according to bankruptcy filings.

While full losses are not confirmed, Jefferies holds $715 million in receivables linked to the bankrupt auto-parts maker First Brands Group through its Leucadia Asset Management fund, according to a regulatory filing. Its stock has fallen 20% since Jefferies was revealed as a creditor in the bankruptcy.

“What has been growing in the past couple of years, loans to funds, loans to non-bank financial companies. So that’s the big worry you hear from people in Washington,” Chris Whalen, chair of Whalen Global Advisors, said on Yahoo Finance.

“So far, credit is okay,” Whalen added.

David Hollerith covers the financial sector, ranging from the country’s biggest banks to regional lenders, private equity firms, and the cryptocurrency space.

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