Several major Wall Street banks are set to begin disclosing their third-quarter earnings next week. Overall, the core dynamic of this quarter's results is clear: while equity trading revenues are poised to hit record highs, bank stocks will diverge far more significantly than in the first half of the year, weighed down by the triple pressures of retreating fixed-income performance, cooling capital markets activity, and unrealized losses in Accumulated Other Comprehensive Income (AOCI).
The bank earnings season kicks off on October 13, $Goldman Sachs (GS.US)$ 、 $JPMorgan (JPM.US)$ 、 $Wells Fargo & Co (WFC.US)$ with disclosures beginning before the market opens. Data indicates that the combined equity trading revenue for Wall Street’s largest banks is expected to approach $19 billion in the third quarter, while contraction in fixed-income businesses acts as a drag.
This combination signals the end of the "everyone wins" narrative from the first half. Mike Mayo, an analyst at Wells Fargo & Co, put it bluntly: "For the first half, it was almost as if everyone was winning, but that may no longer be the case. The divergence between winners and losers could widen this quarter."
Equities carry the load as fixed income hits yearly lows
The strength in equity trading is the most certain highlight of the third-quarter reports, with Goldman Sachs expected to lead Wall Street’s $19 billion in equity trading revenue.
Goldman Sachs’ equity trading revenue for the third quarter is projected at $5.1 billion, $Morgan Stanley (MS.US)$ $4.9 billion for Morgan Stanley, $4.5 billion for JPMorgan, $Bank of America (BAC.US)$ and $2.6 billion for Citi; $Wells Fargo & Co (WFC.US)$ Bank of America saw growth in both equity and fixed-income trading revenues amid raised net interest margin guidance for the quarter, bringing its performance roughly in line with peers.
By contrast, the contraction in fixed-income businesses has acted as a drag. The combined estimated revenue from fixed-income operations at the five largest banks exceeded $19 billion in the third quarter, down from over $21 billion in the second quarter, and may have hit a yearly low, partly due to an elevated base effect from the previous year.
Rising interest rates are a double-edged sword for trading desks: they benefit lending operations as customers pay more interest, but hinder fixed-income trading desks as falling bond prices erode profits from market-making and inventory positions. Bank of America’s stock price dropped sharply in mid-September after CEO Brian Moynihan warned of a decline in third-quarter fixed-income trading revenue; during the same period, Goldman Sachs CEO David Solomon also acknowledged weak fixed-income performance, while noting that equity trading remained "strong."
Capital Markets Business: Jefferies Delivers the First Results
$Jefferies Financial (JEF.US)$ Having been the first to release its earnings report in September, it provided the market with an initial reference point: its investment banking and equity trading businesses hit record highs, but net revenue from fixed-income trading fell 26% year-on-year. These figures almost precisely foreshadowed the narrative unfolding among major banks.
Deutsche Bank expects investment banking fees at covered banks to rise 7% year-on-year in the third quarter, slightly higher than Dealogic data (which showed the quarter was slightly softer than expected). Structurally, equity capital markets led growth with an 8% year-on-year increase, while M&A activity fell 7%, debt capital markets declined 6%, and syndicated loan revenue dropped 26%. In terms of volume, globally announced M&A value decreased 1% year-on-year, completed M&A rose 12%, equity issuance increased 39%, bond issuance grew 3%, and syndicated loans fell 18%. Deutsche Bank also maintains a slight downward bias regarding weaker activity levels in late September.
At the individual company level, the market currently expects JPMorgan’s third-quarter investment banking fees to rise 15% year-on-year, Goldman Sachs by 8.1%, and Morgan Stanley by 1.9%. Bank of America analyst Ebrahim Poonawala offered a more direct assessment: capital markets activity in the second half of 2026 will be "significantly weaker" than in the first half, raising questions about the "sustainability of the current capital markets cycle."
Issuance Pipeline: IPOs Are the Only Bright Spot
The debt underwriting business has a buffer: a refinancing "wall" over the next three years, with this demand somewhat already embedded in the pipeline. Mayo stated, "Regarding debt underwriting, there is a refinancing wall over the next three years, which is to some extent already built in." However, he also warned that if interest rates continue to rise, it will dampen bond demand.
The M&A pipeline has also shown signs of weakness in recent weeks. In the three months ending in September, the value of announced M&A deals fell approximately 10% compared to the same period last year. Initial public offerings (IPOs) remain the brightest window this year—June$SpaceX (SPCX.US)$Following a record-breaking listing, artificial intelligence company Anthropic PBC is scheduled to meet with potential investors next week to prepare for its IPO; meanwhile,$Oura Inc (OURA.US)$and the CVC Capital Partners-backed$Bamboo Insurance Services (BMB.US)$both postponed their listing plans in September.
JPMorgan CEO Jamie Dimon hinted on Tuesday that activity has slowed compared to the first half of the year, but this slowdown is more pronounced in the United States: "If you look at the IPO and M&A pipeline in Europe, it is quite robust; if you look at the U.S., there was likely some slowing in September."
Net Interest Income: Divergence is the true main theme of the third quarter
Deutsche Bank expects that interest rate volatility will force some banks to raise and others to lower their net interest income guidance. Deutsche Bank projects that the average net interest income for banks in its coverage universe will increase by 2% quarter-on-quarter and 8% year-on-year in the third quarter, but beneath the aggregate figures lies significant individual divergence.
Underpinning this assessment is the surge in the 30-year RMBS pass-through rate in the third quarter, which jumped by approximately 102 basis points, nearly triple the 37-basis-point increase seen in the first half of the year. Such drastic interest rate shifts have made quarterly forecasting for the core metric of "net interest income" particularly challenging. Specifically, JPMorgan is likely to be the most direct beneficiary, as it habitually marks its forward curve to market when setting net interest income guidance. In July, management provided fiscal 2026 guidance of $105.5 billion ($96.5 billion excluding the trading division). Deutsche Bank believes that interest rate factors alone could contribute over $1 billion in annual revenue; the company has disclosed that every 100-basis-point rise in rates increases its net interest income by 1.7%. Bank of America shows a slight upward bias, with management currently guiding fiscal 2026 net interest income growth to the upper end of the 6% to 8% range. Deutsche Bank assumes an 8.0% growth rate and believes the actual figure could be hundreds of millions of dollars higher.
Pressure is concentrated on several other institutions. Truist (TFC.US) maintained its fiscal 2026 guidance unchanged, but this guidance does not include the $5.5 billion auto loan sale from late Q3 to early Q4, which will act as a drag in the fourth quarter. The company has also announced its exit from subprime auto, RV, and boat lending, and is amortizing $1 billion in prime auto loans in each of the third and fourth quarters, meaning actual loan runoff may exceed the announced figures.$U.S. Bancorp (USB.US)$Deutsche Bank slightly raised its net interest income guidance for the third quarter during the period, but warned that the fourth quarter might be slightly weaker than expected due to front-loaded drag from rate hikes. The bank's medium-to-long-term exposure to interest rates is relatively neutral, but liabilities are repricing faster than assets. Management has also abandoned its target of achieving a 3% net interest margin by 2027. While Morgan Stanley’s wealth management segment may see a slight downward revision in its net interest income outlook, Deutsche Bank considers this not a significant driver of the company’s overall profitability.
Most other banks are likely to maintain their guidance unchanged:$Fifth Third Bancorp (FITB.US)$has raised its fiscal year 2026 outlook,$Huntington Bancshares (HBAN.US)$has lowered its guidance for fiscal year 2026 and even 2027, providing target ranges that include different interest rate scenarios,$KeyCorp (KEY.US)$、$M&T Bank (MTB.US)$and$Regions Financial (RF.US)$All three banks reaffirmed their full-year guidance in September. Deutsche Bank expressed slightly greater concern regarding regional financial institutions, as its guidance assumes the continuation of "historically low deposit betas," whereas management expects deposit betas to rise to the high 20% range in the fourth quarter.
This cycle is fundamentally different from the previous one.
Another key to interpreting the third-quarter reports is that the operating environment of the current rate-hike cycle is almost the exact opposite of that in 2022. Deutsche Bank outlines four key differences.
First, the starting point for rate hikes is significantly higher. Before the first hike in this cycle, the federal funds target range was 3.50% to 3.75%, compared to just 0 to 25 basis points at the start of the previous cycle in March 2022. Moreover, the magnitude and pace of rate hikes in this cycle are expected to be more moderate—the current forward curve prices in nearly four hikes, whereas only one to two were priced in as of May 22. Second, capital is less exposed to interest rate shocks, reflecting higher capital levels and returns on capital, shorter portfolio durations, increased use of interest rate swap hedges, and a greater allocation of securities to the held-to-maturity account rather than the available-for-sale account, thereby eliminating the mark-to-market impact on Accumulated Other Comprehensive Income (AOCI). Third, the competitive landscape for deposits has changed. In 2022, banks faced excess deposits and sluggish loan growth; today, while deposit competition is fierce, loan growth remains robust. Data cited by Deutsche Bank from the H.8 report (as of September 23) shows average loans increased by 1.2% month-over-month and 7.3% year-over-year, while ending deposits declined by 0.9% from June 30. Fourth, deposit costs remain relatively low. The industry-wide deposit cost in the second quarter of 2026 is estimated at approximately 64% of the effective federal funds rate, significantly below the long-term average of 80% to 85% observed since 1984.
Developments in the credit market also warrant attention. In the third quarter, U.S. high-yield bond spreads widened by 37 basis points, with 32 basis points of that widening occurring in the final week of the quarter; European high-yield bond spreads widened by 56 basis points. Since September 30, high-yield spreads have widened by an additional 5 to 10 basis points, while investment-grade spreads have remained largely stable. Deutsche Bank notes that spread widening does not directly impact the AOCI and capital of most banks, given their limited direct exposure to corporate bonds and the fact that loans are not marked to market. However, it may exert influence through channels such as reduced loan origination volumes, drag on fixed-income trading, and gradual erosion of credit quality over time.
AOCI Impact: Pressure on Capital Accounts
The flip side of rising interest rates is the structural erosion of capital adequacy ratios, which constitutes the core underlying theme of this round of third-quarter reports. Deutsche Bank calculates that in the third quarter, the yield on the 10-year U.S. Treasury note rose by 82 basis points from June 30 (spot basis), while the pass-through yield on 30-year RMBS increased by 102 basis points, the latter serving as a good proxy for bank securities portfolios. Changes in 30-year RMBS rates alone are estimated to impose a capital shock of 40 to 45 basis points on large banks. Under an alternative calculation method, Deutsche Bank estimates that rising interest rates placed an average pressure of approximately 51 basis points on the book capital (adjusted for AOCI) of the covered banks—unrealized losses on available-for-sale securities directly reduce Common Equity Tier 1 (CET1) capital through the AOCI account. As Bloomberg pointed out, such shocks create "paper losses," leading to volatility in earnings reports.
Deutsche Bank introduced a new algorithm in its report: instead of merely calculating gains and losses on available-for-sale securities, it extrapolates the third-quarter impact by multiplying the actual changes in AOCI during the period of rising interest rates in the first half of the year by a factor of three. While the average industry impact under both methods is broadly similar, there is significant divergence among individual banks. Capital pressure has eased noticeably for investment banks (Goldman Sachs, Morgan Stanley) and money-center banks (JPMorgan, Bank of America, Wells Fargo & Co), with Morgan Stanley and Wells Fargo & Co showing the largest adjustments. Among large regional banks, performance is mixed: capital pressure decreased for CFG, FITB, and USB, while Manufacturers and Traders Bank, Regions Financial, and Truist experienced higher capital losses.
Deutsche Bank also emphasizes that the covered banks still possess ample capital to meet regulatory and rating agency requirements and to support loan growth—the true constraint lies not in "sufficiency" but in "willingness." Taking JPMorgan as an example, its CET1 ratio reached 14.2% in the second quarter, the highest among money-center banks. Deutsche Bank estimates that after a 60-basis-point capital shock caused by rising interest rates, its pro forma capital level would be approximately 13.6%, still 210 basis points above current regulatory requirements. For Wells Fargo & Co, Deutsche Bank projects that its net interest margin, excluding the trading division, will exceed the second-quarter estimate of 2.95% in 2027 and beyond.
The retreat of share buybacks is highly likely.
Although absolute capital levels still meet regulatory requirements, Deutsche Bank judges that most banks will slow down or even suspend share buybacks due to rapidly rising interest rates, high uncertainty in the outlook, and strong loan growth. Deutsche Bank predicts that the banks in its coverage universe will conduct a total of $31 billion in buybacks in the third quarter (up from $28 billion in the second quarter), but maintains a downward bias for buybacks in the third and fourth quarters: only U.S. Bancorp has explicitly lowered its third-quarter buyback guidance, but Deutsche Bank believes Fifth Third Bancorp has effectively paused buybacks, and other banks may similarly contract their programs.
Regarding the specific pace, money-center banks (JPMorgan, Bank of America, Wells Fargo & Co) are likely to "slow down without stopping." Among the nine large regional banks covered by Deutsche Bank, seven have simulated capital ratios at or below 9.0% after including Accumulated Other Comprehensive Income (AOCI), making it highly likely they will directly suspend buybacks. Deutsche Bank expects buybacks to return to mid-single-digit growth only after interest rates stabilize, while there is still upside potential if regulatory capital rules are implemented and Federal Reserve stress tests are relaxed.
The AI Shadow: Is Panic Trading Overpriced?
Beyond earnings performance itself, bank stocks faced additional pressure in the third quarter—market concerns about artificial intelligence, and fears that AI agents might divert deposits away from the banking system. Morgan Stanley analyst Manan Gosalia stated, "Related stocks have corrected significantly, driven by concerns over slowing capital markets revenue growth this quarter, higher funding costs, and AI-driven cash optimization tools." The third quarter became$KBW Nasdaq Bank Index (.BKX.US)$the worst quarter since the first quarter of 2023 (when the U.S. regional banking crisis began to spread). However, Morgan Stanley analyst Gosalia and Wells Fargo & Co analyst Mike Mayo both believe that this round of "panic trading" has been overpriced.
However, sell-side analysts generally believe this "panic trading" has gone too far. Gosalia pointed out, "The entire AI investment cycle is a multi-year cycle, not limited to hyperscale cloud providers; it will continue to support capital markets in the coming years." Both Mayo and Gosalia believe that against the backdrop of Wall Street delivering another strong quarter, cheap stock valuations could become a winning point for investors. Gosalia stated plainly: "We view this correction as an attractive entry point." (As of press time, Citi led the gains, while Bank of America's stock price is on track to end the year lower.)
Conclusion: An Earnings Season with High Volume and Low Certainty
Combining these two threads, the picture for the third-quarter earnings report is quite clear. Highlights on the revenue side are concentrated in equity trading and equity capital markets. Investment banking fees and net interest income, on average, are still expected to record mid-to-high single-digit year-over-year growth, credit costs remain moderate, and equity trading revenue is set to approach a record $19 billion.
However, pressures are also concentrated and aligned: fixed-income revenue hit its lowest level of the year, the value of announced M&A deals fell by approximately 10% year-over-year, unrealized losses in AOCI suppressed Common Equity Tier 1 capital, and the AI narrative further weighed on valuations. In late September, Deutsche Bank downgraded KeyCorp, PNC Financial Services, and Regions Financial due to full valuation and concerns over high interest rates; this quarter's earnings reports will provide the first answers to these judgments.
Regarding specific picks, Deutsche Bank maintains JPMorgan, Wells Fargo & Co, and Huntington Bancshares as its top choices: JPMorgan stands out for its capital strength (CET1 ratio of 13.6%, 210 basis points above regulatory requirements) and net interest income sensitivity (+1.7% per 100 basis points), with expense guidance being a key variable to watch; Wells Fargo & Co excels in net interest margin and expense discipline, and may disclose net interest margin guidance excluding the trading division for the first time; Huntington Bancshares offers value due to expectation gaps and valuation discounts, with its share price trading at only 8.7x the low end of its new fiscal 2027 EPS target range, compared to peers trading at 10x based on 2027 consensus estimates.
Deutsche Bank’s summary is that while bank capital remains ample, uncertainty regarding the interest rate path is causing management to deprioritize aggressive share buybacks in their capital allocation frameworks.
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Edited by lambor