Q2 Bank Earnings Preview: Hawkish Fed Pivot Eyed

Back in April, big banks entered first-quarter earnings season grappling with a war in Iran, surging inflation, and a market expecting possible rate cuts. The banks proceeded to impress with their results, and the sector posted sharp second-quarter market gains.

Heading into earnings season this week, the macro climate has shifted dramatically, with implications for Wall Street's iconic names and the broader banking industry. Initial public offering (IPO) volume has skyrocketed and more deals are in the pipeline, the Federal Reserve seems more likely to hike than ease rates, and a framework deal between the United States and Iran may pressure crude oil and Treasury yields.

Banks are expected to roll with the punches and deliver solid earnings reports, though the future is somewhat hazy amid these shifting economic and monetary trends. Banks kick off earnings season Tuesday, when several of the biggest names report.

"The big banks report early in the earnings season and can often set the tone for the whole market," said Alex Coffey, senior trading and derivatives strategist at Schwab.

The nearly 20% rise in the KBW Nasdaq Bank Index (BKX) between the end of March and late June outpaced a 13% gain in the broader market over the same period, suggesting investors at that time still saw banks benefiting from economic fundamentals.

But fundamentals may be in question, despite a bright earnings picture, amid worries that a hawkish Fed could remove the punch bowl. Weaker-than-expected first-quarter consumer spending data and sluggish June jobs growth have raised fresh economic concerns just as investors have begun to anticipate rising rates.

"The recent more hawkish stance from the Fed and the subsequent flattening in the yield curve was certainly a negative surprise to the big banks, but after passing recent stress tests, they were able to announce a large amount of shareholder-friendly activity, like stock buybacks and dividend hikes," Coffey said. "Also, the recent decline in oil prices is likely to lessen the economic impact of a prolonged oil spike if geopolitical tensions continue to subside. If the recent M&A activity, trading volumes, and IPO markets continue to run as hot as they have, that is also likely a major positive for these names."

Fed policy matters for banks because it plays into net interest income (NII), a core driver of bank earnings. NII measures the difference between what banks earn on loans minus what they pay depositors.

Banks typically borrow at short-term rates and lend at long-term rates, so when the gap between those two rates widens—often called yield curve steepening—it tends to boost NII. That's what happened in recent years, providing a strong tailwind for banks' earnings.

The curve was steepening coming into 2026 but flattened recently as short-term yields rose relative to longer-term yields amid expectations the Fed might raise rates later this year.

A surprisingly hawkish tone from new Fed Chairman Kevin Warsh at the June FOMC meeting—where he focused heavily on bringing down inflation rather than growing jobs—led markets to price in the possibility of a first hike as soon as September. Chances of that were nearly 60% in early July, according to the CME FedWatch Tool, though Schwab analysts don't expect the Fed to tighten policy anytime soon.

For banks, this is a challenge. Even with the curve flattening since mid-June, long-term yields remain elevated, with the 10-year Treasury note above 4.4%. This has two effects: banks can still lend money at attractive long-term rates, cushioning NII, but persistently high long-term yields also tend to dampen loan demand, which many banks depend on for revenue.

Higher yields also can weigh on the overall stock market, eventually denting trading revenue if trading volume fades. Though the S&P 500 Index traded near record highs in June above 7,500, it hasn't shown much momentum since, and this recent peak isn't far from JPMorgan Chase's 7,800 year-end price target for the index.

Recent hiccups in the hot AI trade that sent tech stocks reeling might also damage trading sentiment. Poor sentiment isn't guaranteed to reduce trading volume for Wall Street giants like JPMorgan Chase (JPM), Goldman Sachs (GS), and others, but it could make banks and their investors nervous.

Both second-quarter NII results and NII guidance for the third quarter are metrics to watch when banks report. One thing that's tripped up bank stocks after past earnings is disappointment on this front.

On a more positive note, calming Middle East tensions have driven oil prices down sharply over the last month. That creates a very different climate from when banks reported first-quarter earnings in April and faced what some analysts believed might be danger from inflation-related loan losses. The jobs picture has also improved modestly since then (despite June's disappointing number), suggesting consumers and businesses may have a smoother path ahead that could help fuel demand for bank services like loans and mergers.

The IPO climate has heated up since April, notably with the SpaceX (SPCX) IPO last month. While SpaceX grabbed headlines, the second quarter featured 48 total IPOs that raised a record-breaking $104.9 billion, Renaissance Capital reported on June 24.

"Even without the headline deal, the second quarter would have been the biggest quarter for IPO proceeds since 2021, driven by a steady flow of very large deals," Renaissance said. "Nine other IPOs raised $1 billion or more, led by AI chipmaker Cerebras."

Many banks enjoy revenue spikes from helping companies with their IPOs, and investors likely want to hear this week how the biggest Wall Street firms expect the IPO and merger market to develop in coming quarters.

Ben Snider, chief US equity strategist at Goldman Sachs Research, said recently that the strong IPO climate indicates positive sentiment both on the corporate side and among investors.

"We have, of course, some very large companies that are coming to market, and we have this immense desire for capital to help fund the AI boom," Snider said in a June 22 podcast. "The real concern from investors is, is this indicative of a kind of euphoric environment that marks the peak of bubbles? It's not lost on clients that we also saw a very sharp increase in IPO activity, for example, in the late 1990s (and) in 2021." Both those eras preceded Wall Street downturns.

Keep in mind, though, that IPO fee revenue only flows to a handful of Wall Street banks, not the entire financials sector.

Trading activity was a tailwind for Wall Street banks in the first quarter, and continued market volatility in the April-to-June period likely pushed trading revenue higher. This matters most for banks like JPMorgan Chase, Morgan Stanley (MS), and Goldman Sachs, which all pull in a major percentage of revenues from trading floor volume.

The strong rally in chip stocks since April likely helped banks earn more cash, though the potential downside of that is fading trading interest if the rally slows.

"We are definitely in a moment where there's more greed than there is fear," Goldman Sachs CEO David Solomon told CNBC in an interview last month. He also said, "There's plenty of liquidity in the system if the world continues to remain as optimistic."

AI demand led several major tech firms to issue more than $140 billion in investment-grade bonds through early June as hyperscalers spent hundreds of billions on AI. This type of spending raised eyebrows, but Goldman's Solomon didn't seem overly concerned.

Greed can "turn into fear very quickly, but that doesn't mean it will," Solomon said, according to CNBC. "Exuberance can go on for big periods of time. ... There's a good chance that we're earlier in the cycle than later."

One potential headwind for banks is on the revenue side. The second quarter of 2025, which upcoming earnings will be compared to year over year, featured heavy revenue gains driven by massive trading volume and tariff-driven volatility. Those elevated comps will be harder to surpass. Still, analysts* expect almost all major banks to report solid revenue gains year over year.

Merger and acquisition (M&A) activity can also power bank earnings, and the environment there seems mixed heading into the quarter.

"Our new survey indicates cautious optimism is persisting in the market, and while dealmakers are still leaning in, they're doing so with more discipline," said Adam Reilly, national managing partner, merger and acquisition services, Deloitte, in a press release last month. According to the firm's midyear survey, 67% of respondents said they expect the number of deals they complete to grow over the next six months, while 69% expect an increase in total deal value.

When it comes to headwinds, bank investors will likely focus on credit quality, with inflation still elevated and consumer defaults relatively high. Loan growth, which frequently comes up on banks' earnings conference calls, is another indicator that could shed light on the banking industry's health.

Total household debt rose by $18 billion, a 0.1% increase, in the first quarter of 2026, to $18.8 trillion, according to the New York Fed. Aggregate delinquency showed little change in the first quarter, with 4.8% of outstanding debt in some stage of delinquency. Transitions into early delinquency held steady for auto loans but ticked down for credit cards. Mortgage balances rose $21 billion in the first quarter.

Transitions into serious delinquency were mostly unchanged for auto loans and credit cards but accelerated slightly for mortgages from 1.4% to 1.5%, according to the New York Fed.

If banks increase loan-loss provisions, which they tend to do when they're concerned about a rise in defaults, it could be evidence they're preparing for an economic slowdown. Higher loan-loss provisions can weigh on earnings growth.

Stress in the private credit market has also drawn increased attention this year, with multiple private credit funds facing liquidity issues and a few high-profile borrower defaults. While credit markets remained resilient in the second quarter, banks do have exposure to these loans.

The issue could come up on conference calls, as it did last quarter, when banks reassured investors. Bank of America (BAC), for instance, said in an April conference call that it hadn't experienced any material losses related to private credit, Bloomberg reported.

Though private credit jitters and debt offerings from big tech are worth tracking, there's no real sense that the market faces the type of credit issues that can lead to treacherous waters. Credit spreads remain low across the board despite all the issuance, thanks to a resilient economy and robust first-quarter earnings growth.

And banks themselves seem to be in healthy shape from a liquidity standpoint, having just passed the Fed's annual stress tests with flying colors.

Big banks like JPMorgan Chase, Bank of America, and Goldman Sachs have often delivered positive earnings surprises, which in turn boosts market sentiment. They certainly might do that again. But their outlooks and observations about the health of business and consumers can also play into the stock market's response.

Overall, analysts expect second-quarter S&P 500 financials sector earnings to climb 5.8% year over year, according to FactSet. That compares with first-quarter earnings growth of 21.7%. The financials sector includes many smaller banks, brokerages, insurance companies, and payment firms, but big banks often draw the most focus. Revenue growth for the financials sector is projected at 8.8% year over year, down from a 10.9% pace in the first quarter, FactSet said.

For the major banks reporting this week, analysts* expect the following:

JPM: Earnings per share (EPS) of $5.78, up 10.3% year over year, on revenue of $50.0 billion, up 9.4% from a year earlier

WFC: EPS of $1.71, up 6.94% year over year, on revenue of $21.8 billion, up 8.4% year over year

MS: EPS of $2.87, up 34.8% year over year, on revenue of $19.4 billion, up 15.4% from a year earlier

BAC: EPS of $1.12, up 26% from a year earlier, on revenue of $30.5 billion, up 14.6% from a year ago

GS: EPS of $14.04, up 28.7% from a year ago, on revenue of $15.9 billion, up 9% from a year ago

C: EPS of $2.71, up 38% year over year, on revenue of $23.5 billion, up 8.2% from a year ago

*Note: Average analyst earnings and revenue estimates are as of July 7, 2026, courtesy of Schwab.com, and are subject to change.