Wall Street’s Q3 Earnings Season Set to Reveal a Widening Divide
TREE NEWS reports: Wall Street’s largest banks are poised to report another strong quarter in equity trading, but a cooling capital markets environment and mounting anxiety over AI-driven deposit outflows are set to expose sharp divergences in performance across the sector. Analysts expect the five biggest U.S. banks to collectively post nearly $19 billion in third-quarter equity trading revenue, with Goldman Sachs leading at an estimated $5.1 billion, followed by Morgan Stanley at $4.9 billion, JPMorgan at $4.5 billion, and Bank of America at $2.6 billion. Goldman Sachs will kick off the reporting cycle on Tuesday.
Fixed Income Trading Slides to Yearly Low
Fixed income trading is emerging as the weak spot. Combined revenue from the five banks is projected to exceed $19 billion, down from more than $21 billion in the second quarter and marking the lowest level of the year. Bank of America CEO Brian Moynihan warned in mid-September that the firm’s fixed income trading revenue would decline in the third quarter, sending its shares sharply lower. Goldman CEO David Solomon echoed that sentiment, noting that fixed income performance lagged behind a still-robust equities franchise.
Rising interest rates may boost loan interest income, but they also pressure trading operations. They introduce mark-to-market volatility on bank-held assets, flowing through accounting lines such as accumulated other comprehensive income. Debt underwriting offers some support, with a wave of maturing debt over the next three years expected to drive refinancing demand — though analysts caution that further rate increases could dampen bond appetite.
M&A and IPO Pipelines Show Fatigue
Capital markets activity is a key focal point this quarter. Announced M&A deal value fell roughly 10% year-over-year in the third quarter, with U.S. activity showing particular deceleration. The IPO market had a bright spot earlier this year, but some listings have hit snags. JPMorgan CEO Jamie Dimon said the European IPO and M&A pipeline looks solid, but acknowledged the U.S. market may have slowed somewhat in September.
Analyst estimates point to investment banking fee growth of 15% for JPMorgan, 8.1% for Goldman Sachs, and 1.9% for Morgan Stanley. Jefferies, which reported earlier, illustrated the divergence: record quarterly performance in investment banking and equity trading, but a 26% year-over-year decline in fixed income trading net revenue.
AI Deposit Fears Weigh on Bank Stocks
Beyond trading, investors are increasingly worried that AI-powered cash optimization tools could help corporations allocate capital more efficiently, pulling deposits away from traditional banks. The KBW Bank Index posted its worst quarterly performance since the regional banking crisis in early 2023.
Morgan Stanley analyst Manan Gosalia attributed the selloff to multiple concerns: slowing capital markets revenue growth, rising funding costs, and potential deposit outflows linked to AI cash tools. He argued, however, that the AI investment cycle will span years and benefit not just large cloud providers but also capital markets businesses over the long term. Both Gosalia and Wells Fargo analyst Mike Mayo contend that market fears over AI’s impact on banking are overdone.
Key Takeaways for Investors
- Expect dispersion, not uniformity: The “everyone wins” dynamic of the first half is fading. Stock picking within financials will matter more than sector-level exposure.
- Equity trading is the bright spot: Goldman and Morgan Stanley are best positioned to benefit from continued equity market volatility and client activity.
- Fixed income is the drag: Watch for guidance on whether the Q3 weakness is seasonal or structural, particularly as rate uncertainty persists.
- AI deposit narrative is a sentiment risk: Even if overblown, the fear itself can pressure bank valuations until earnings demonstrate deposit stability.
- Capital markets recovery is uneven: The M&A and IPO pipeline remains selective, and any further rate increases could delay a broader rebound.
