Wall Street giants' financial reports tonight: With stock prices trapped in technical correction, even a 20% profit increase can hardly ease triple anxiety

According to Zhitong Finance APP, as the U.S. large bank stocks hover within a technical correction range ahead of Tuesday's earnings season kickoff, the sharp rise in long-term borrowing costs to the highest levels in decades has heightened market focus on bank executives' assessments of U.S. consumer health and credit outlook.

According to compiled analyst estimates, Wall Street's largest banks are expected to report about $19 billion in quarterly equities trading revenue. Meanwhile, lending volumes are expected to increase year-on-year, and credit quality is also likely to remain stable. However, the KBW Bank Index, the industry's benchmark, has fallen about 12% since its mid-August peak, exceeding the 10% threshold for a technical correction. This decline coincided with a surge in U.S. Treasury yields and the Federal Reserve's first rate hike in three years. The index is thus experiencing its worst quarterly performance since early 2023—back then a similar rise in yields sparked a regional banking crisis and battered bank stocks.

This forces banks to strike a balance between deposit payment costs and loan returns, while dramatic bond market volatility adds pressure. Matt Miskin, strategist at Manulife John Hancock Investments, noted that the continued climb in credit card, auto loan, and mortgage rates is exerting additional pressure on banks. He stated, “Higher yields can drive better income but may also reach a breaking point at which consumers are unable to repay those loans.”

Currently, ten-year U.S. Treasury yields are steady near 5.2%, after recently hitting their highest levels since 2002. Thirty-year Treasury yields are around 5.6%, also approaching a two-decade high. Previously, the Fed’s September meeting minutes showed all 19 policymakers supported the rate hike in September, and most believed further tightening within the year would be necessary. The market currently prices about a 70% probability of a December rate hike.

Strong Earnings Expectations, but Complex Market Sentiment

Despite stock price pressure, analysts still expect major banks to post a 20% year-on-year increase in third-quarter profits, with significant gains in investment banking and trading income compared to the last quarter, and no signs of deteriorating credit portfolios. Last month, Jefferies (JEF.US), one of the earliest to report, said its investment banking and equities divisions had a record quarter, though other metrics were mixed.

Specifically: JPMorgan Chase (JPM.US) expects earnings per share of $5.94, about 17% higher than the $5.07 a year earlier, with revenue expected to rise from $47.1 billion to $51.2 billion. Co-President Doug Petno previously stated that investment banking fees and trading income are expected to achieve “mid-to-high double-digit” growth.

Goldman Sachs (GS.US) expects earnings per share of about $12.44 and revenue of about $16.8 billion, up from $12.25 and $15.2 billion a year earlier. CEO David Solomon previously cautioned investors that fixed income, forex, and commodities divisions would underperform, while equities would remain robust.

Bank of America (BAC.US) expects earnings per share of $1.10, slightly up from $1.06 a year ago, with revenue expected at $30.55 billion. However, CEO Brian Moynihan previously warned that investment banking fees are expected to decline at least 10% year-on-year, causing the bank's shares to fall sharply. He stated, “We have very little exposure in some of the more active businesses, so the drop may be even greater.”

Citi (C.US) expects earnings per share of $2.41, with revenue estimated at $23.72 billion. CFO Gonzalo Luchetti previously said the bank expects its return on tangible common equity to slightly exceed the 11% target this year and plans to expand stock buybacks in 2026.

Wells Fargo (WFC.US) expects earnings per share of $1.85, with revenue at $22.32 billion. CFO Mike Santomassimo stated that loan growth in 2026 is projected to be better than previously expected, and U.S. consumption and credit trends remain healthy.

Morgan Stanley (MS.US) expects earnings per share of $2.94, with revenue reaching $20.11 billion. Co-President Dan Simkowitz noted that the bank’s investment banking pipeline still looks solid, and corporations are in the middle of the AI investment cycle.

Four banks—Citi, Goldman Sachs, JPMorgan Chase, and Wells Fargo—will report results before Tuesday's U.S. market open, while Bank of America and Morgan Stanley are set to report on Wednesday.

Cooling IPO Market Intensifies Investment Banking Concerns

However, the surge in bond yields has already caused a significant drag on capital markets activity. At the end of the third quarter, smart ring manufacturer Oura and SoftBank-backed AI data center developer SB Energy both delayed their IPO plans. According to Renaissance Capital, seven companies announced the postponement or withdrawal of IPO plans in the third quarter, up from four in Q2 and three in Q1. Only 30 IPOs were completed, the lowest in ten quarters, raising a total of $32.8 billion—far below the 48 in Q2 and the ten-year Q3 average of 49 deals.

UBS bank analyst Erika Najarian noted in a client report that weakness in bank stocks is directly tied to surging yields, and investors need reassurance that capital market pipelines remain adequate, loan growth is on track, and rising deposit costs are manageable.

Cheryl Pate, Senior Portfolio Manager at Angel Oak Capital Advisors, believes investors will focus on guidance on credit growth and deposit costs. “We do not expect large-scale deposit outflows—i.e., clients chasing higher returns—nor do we foresee a sharp increase in deposit costs,” Pate said. She also pointed out that despite recent rate hikes, analysts do not expect banks to face unrealized losses in their securities portfolios as they did during the 2023 banking crisis. “Most banks have since shortened the duration of their portfolios and managed the related risks.”

AI ‘Panic Trading’ and Midterm Election Risks

Apart from rates, bank stocks also face multiple non-traditional risks. The potential impact of AI agents on traditional banking deposit and loan business models, as well as policy uncertainties related to the November midterm elections, are also in investors’ spotlight.

JPMorgan analysts previously predicted that a surprise landslide win for the Republican Party could favor lenders such as Bank of America, Citigroup, and Wells Fargo, as the party traditionally leans towards looser financial regulation. However, polling shows Republicans are losing ground due to voter dissatisfaction with the economy and the Iran conflict.

Manulife's Miskin noted that banks and sectors such as industrials—those typically benefiting from Republican policies—have underperformed recently, which may indicate the market is pricing in a potential Democratic sweep ahead of time.

On the AI front, Meta (META.US) recently launched its consumer-facing AI agent Muse, triggering concerns over whether AI agents might erode banks’ deposit bases and wealth management businesses—a worry that at times led to AI-driven “panic trading” in bank stocks.

Research firm Citrini Research provided a theoretical framework for this panic in a report. The report posits that a significant portion of U.S. banking profits is built on customer “inertia”—consumers keep funds in low-yield accounts for convenience and habit, allowing banks to access cheap capital and invest in high-return assets.

Citrini Research’s subsequent report “Breaking The Wall” further stated that autonomous AI agents will operate programmatically, around the clock, and across applications, causing funds and financial assets to circulate similarly, which will dramatically increase demand for programmable financial infrastructure.

Apollo Global Management chief economist Torsten Slok conceptualized this threat as an “agent banking run.” In a September report, he noted that AI assistants like Muse may soon automatically shift household cash from checking accounts earning an average 0.1% interest into fintech accounts offering 3.3% to 5.0%.

Slok wrote in the report, “If every household uses an AI agent to optimize cash returns, banks could lose a large volume of cheap deposits they traditionally lend out—this would be a problem for the entire financial system.”

Institutional Viewpoints Diverge: Buy the Dip or Cut Holdings?

Amid the deep correction in bank stocks, Wall Street analysts are divided.

Wells Fargo analyst Mike Mayo holds a more optimistic stance. In his September report, he noted that while the midterm elections may “impose some impact on deregulation, they won’t derail it,” and expected the AI “panic trade” to reverse as banks report earnings, since “banks’ trust moat is a safeguard for deposits.”

This means, even though AI agents can technically execute fund transfers, whether consumers are willing to hand over financial control to tech firms known for moving “fast and breaking things” remains a major hurdle. Bank of America Global Research shares a similar view, pointing out that while Muse is popular, there’s no evidence so far that users are willing to give their financial account credentials to AI agents.

A late-September survey by Truist found that more than half of bank investors still see Fed rate hikes as the biggest risk to valuations, with only a handful mentioning AI agent threats.

Morgan Stanley analyst Manan Gosalia called the recent selloff an “attractive entry point,” suggesting investors use it to position for a stronger 2027. He noted that AI-related investment and a generally robust economy will support bank stocks, and that while rising rates have driven up funding costs, “income should also increase at the same time.”

However, CIBC Capital Markets strategist Christopher Harvey is more cautious. He expects bank executives’ comments on consumer health and the economic outlook to be more guarded than a few months ago. Even so, he believes the sector may see a “relief rally”—bank stocks often rebound after lagging ahead of earnings. But he added, if a rally materializes, “we’ll use the opportunity to reduce exposure,” and given macro headwinds, he prefers communications services and utilities over financials.

In the options market, traders hold a bullish bias on JPMorgan Chase ahead of its earnings. Late last week, more demand was observed for call options betting on a 10% rise than for protective puts hedging a 10% drop, and open interest in calls outnumbered puts—a potential bullish signal. However, the options market is pricing an implied post-earnings volatility of about 3.57% for JPMorgan Chase shares, higher than the 2.36% average realized move after its last four earnings reports.