Q3 Bank Earnings: Muddier Waters to Navigate

An already challenging environment for banks grew thornier as Treasury yields climbed sharply in the third quarter, potentially slowing growth opportunities ahead and weighing on financial stocks.

Big banks, including JPMorgan Chase (JPM), Goldman Sachs (GS), and Wells Fargo (WFC), kick off the third-quarter earnings season Tuesday after a quarter that saw the financials sector endure modest losses compared with an overall 3% climb for the S&P 500^® Index (SPX). The sector's pullback occurred entirely within the past few weeks. After hitting an all-time peak in mid-August, the KBW Nasdaq Bank Index (BKX) tumbled more than 8% in September.

Analysts expect third-quarter S&P 500 financials sector earnings growth of just 3.3% year over year, according to FactSet. That compares with second-quarter earnings growth of 21.9% and FactSet's third-quarter S&P 500 earnings growth estimate of 29.1% as of September 25. Revenue growth for the financials sector is projected to be 7.4% year over year compared with 14.2% in the second quarter. The financials sector includes many smaller banks, brokerages, insurance companies, and payment firms, but big banks often draw the most focus.

The third quarter was riddled with tough news for banks, including delayed initial public offerings (IPOs), bearish forecasts from banks about their own balance sheets, and the first Federal Reserve interest rate hike in three years.

During the rally in bank stocks earlier this year, the banking picture seemed brighter, in part because oil prices fell as Middle East worries eased and net interest income (NII)—what banks earn on loans minus what they pay on deposits—gave earnings a strong tailwind.

Then crude oil popped again in August when a deal to curb hostilities between the United States and Iran fell apart. This set off the surge in yields that dominated the second half of the quarter and helped spur the rate hike.

The hike also sparked fears that the yield curve might begin to flatten. That's a scenario in which shorter-term yields, which are sensitive to near-term Fed policy, outpace longer-term yields that are tied to the products banks sell (like mortgages and other long-term loans). A flattening yield environment can hurt banks' NII.

So far, that hasn't been the case, as the 10-year Treasury note (TNX) yield slightly outpaced the 2-year yield last quarter. However, market participants are pricing in high odds of at least one more Fed rate hike this year and possibly another early next year even as the Treasury Department initiated a new bond buyback program designed to bring down longer-dated yields. This combination could flatten the curve.

Curve worries have recently eased slightly, along with October rate-hike odds, which fell due in part to a softer-than-expected inflation report in the form of August's Personal Consumption Expenditures (PCE) price index—the Fed's favored inflation gauge. But these concerns didn't vanish entirely with the new quarter. As of early October, CME futures trading built in roughly 90% odds of another hike before year-end.

Even though PCE came in below expectations, it doesn't mean the Fed can relax on inflation. Core annual PCE of 3% in August was well above the Fed's 2% goal. In late September, Minneapolis Fed President Neel Kashkari noted that prices remain elevated and the PCE data didn't "change that story for me very much," Barron's reported.

Looking ahead a year, futures trading indicates high odds of the Fed raising rates from the current target range of 3.75% – 4% to between 4.5% and 5%, according to the CME FedWatch Tool. A rising-rate environment can be challenging, as increased borrowing costs can sometimes hurt loan demand.

Whether or not the curve flattens, Wall Street banks face potential pain in their investment banking businesses thanks to rising yields and concerns about AI safety. The latter led OpenAI to announce in late September that it plans to stay private until it overcomes safety concerns. However, the yield backdrop and its potential weight on IPO and capital spending demand go beyond tech.

"An underappreciated part of the interest rate conversation is that it's often less about the level of yields but rather the volatility of them," said Alex Coffey, senior trading and derivatives strategist at Schwab. "The MOVE index has surged in recent weeks as yields have reached multi-decade highs. Banks face a situation in which many businesses and consumers may pause plans as they reassess market conditions. This applies to the IPO landscape as well as general [capital expenditures] spending. The clear exception is of course AI Capex, which continues to balloon as the AI infrastructure build-out rages on."

OpenAI is only one company, and it may still go public eventually. But this is no ordinary IPO: OpenAI seeks a valuation of about $1.4 trillion, Reuters reported, so its delay could mean a cut in near-term profits for banks handling the transaction.

While AI giant Anthropic might still go public this year, its IPO is likely to be pushed back until after the November 3 midterms, according to Reuters. In its IPO prospectus, reviewed by Reuters, Anthropic warned of dangers associated with AI, adding to worries that flared earlier in September when an industry veteran sounded the AI alarms.

Other experts, including Nvidia (NVDA) CEO Jensen Huang, quickly pushed back. Still, the IPO market and capital spending might not be as robust as previously thought amid calls for regulatory oversight and growing opposition—from public and political leaders in both parties—to data center development.

The IPO market looked hot earlier this year. But that was before the OpenAI delay and a separate September announcement by Oura, a health intelligence platform, that it would delay its IPO.

Banks may already be feeling the impact of the changing tide in the AI trade. In September, Bank of America (BAC) warned that its third-quarter investment banking revenue could slow and forecast flat trading revenue. The company sees investment banking fees of $1.6 billion to $1.8 billion in the third quarter, Bloomberg reported, down from analysts' previous expectations of close to $2 billion.

Bank of America wasn't alone in issuing a gloomy outlook. Citigroup's (C) shares fell last month after the bank projected mid-single-digit quarterly revenue growth from a year earlier for its markets business, a measure of trading activity. That reinforces another possible headwind for banks: Their trading businesses face tough sequential comparisons to the second quarter after market volatility boosted trading then.

With long-term yields already up and another rate hike considered likely before year-end, banks could face pressure on loan demand, a key revenue driver. Continued uncertainty about the Iran war and oil prices means volatility in yields may not go away soon, which may cap loan demand.

Soaring Treasury yields over the past two months could also cool financing activity. Individuals might be less likely to seek mortgages with the 30-year mortgage rate topping 7%, while corporate borrowing demand—outside of the blistering AI data center build-out—could weaken with the 10-year Treasury note yield near its highest levels since 2002.

Higher yields also can hurt the stock market, though major indexes didn't send bearish signals as the third quarter ended; the S&P 500 was up about 3% for the period.

However, this slight gain masked a less-healthy situation below the surface. By the end of the quarter, only about 45% of S&P 500 stocks traded above their 200-day moving averages, down from peaks above 75% in mid-August. This means the market was narrower, with a few mega-caps like Meta Platforms (META), Apple (AAPL), Advanced Micro Devices (AMD), and Intel (INTC) driving late-quarter gains while most sectors outside of tech struggled.

When companies struggle, banks tend to feel the heat, whether it's from falling loan demand or less interest in the trading and hedging services that banks offer. Low volatility in equities during most of the summer pointed to diminished hedging demand.

Volatility was much higher in the bond market, which may provide a third-quarter boost for banks' trading segments. However, it's unlikely the largest banks from an equities trading perspective can match the better-than-70% revenue increases some recorded year over year in the second quarter.

It's not all grim for banks, however. The Atlanta Fed's GDPNow estimate for third-quarter gross domestic product (GDP) growth ended September at 3.7% on a seasonally adjusted annual basis, and the Bureau of Economic Analysis raised its final second-quarter GDP estimate to 2.2% from its previous 1.5%. Retail sales in August looked solid, manufacturing and services data were robust, and consumer spending remained healthy despite rising gas prices. A resilient economy can help banks, though housing remains under a cloud and consumer confidence has sagged in recent weeks.

The credit market remained remarkably calm throughout the third quarter despite all the turbulence. Both investment-grade and high-yield credit spreads stayed narrow in late September, suggesting that loans are still available and lending institutions aren't overly concerned about defaults. How banks see loan demand and the credit market shaping up in the final quarter could be an important part of this month's earnings calls.

In addition, NII results for the third quarter and NII guidance for the fourth quarter are metrics to watch when banks report. If banks reduce NII guidance, it could disappoint investors.

Another item to watch is loan-loss provisions, the reserves banks often increase when they're concerned about a rise in defaults. This can be an early indicator that banks expect an economic slowdown. And for banks themselves, higher loan-loss provisions can hurt earnings growth.

Stress in the private credit market drew attention earlier this year, with multiple private credit funds facing liquidity issues and a few high-profile borrower defaults. That stress hasn't gone away completely, and concerns about what JPMorgan Chase CEO Jamie Dimon famously called "cockroaches" linger. Banks may still have exposure to some of those loans.

"I'll be looking for any signs of credit stress in banks' forward guidance," Schwab's Coffey said.

Overall, banks are expected to deliver results that show slowing but still positive growth. The future beyond that, however, could be hazy. And because banks typically report at the start of earnings season and their businesses give them a high-level view of the U.S. economy, any disappointing results or lackluster guidance could start the reporting period on the wrong foot.

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

• JPM: Earnings per share (EPS) of $5.90, up 16.4% year over year, on revenue of $51.2 billion, up 10% from a year earlier
• WFC: EPS of $1.85, up 11.4% year over year, on revenue of $22.3 billion, up 4% year over year
• MS: EPS of $2.91, up 3.9% year over year, on revenue of $19.4 billion, up 15.4% year over year
• BAC: EPS of $1.11, up 5.7% year over year, on revenue of $30.7 billion, up 10% year over year
• GS: EPS of $13.03, up 6.4% year over year, on revenue of $16.7 billion, up 9.9% year over year
• C: EPS of $2.66, up 43.1% year over year, on revenue of $23.5 billion, up 8.2% year over year

*Note: Average analyst earnings and revenue estimates are as of October 12, 2026, courtesy of Schwab.com, and are subject to change.