US bank stocks face a major third-quarter earnings test: equity trading props up results, while AOCI unrealized losses and fading buybacks become hidden concerns.

Note that several major Wall Street banks will kick off the third-quarter earnings disclosure period next week. Taken together, the core tension in this quarter's earnings is very clear: equity trading revenue will hit a record high, but under the triple pressure of a fading fixed income business, cooling capital markets activity, and AOCI (accumulated other comprehensive income) unrealized losses, the divergence among bank stocks will be far more pronounced than in the first half. Bank earnings season will begin on October 13, with Goldman Sachs Group, Inc. (GS.US), JPMorgan Chase (JPM.US), and Wells Fargo & Company (WFC.US) among the first to report before the open. According to analyst data compiled, the largest Wall Street banks are expected to report combined third-quarter equity trading revenue of nearly $19 billion, while contraction in the fixed income business acts as a drag. This combination means that the "everyone is winning" first half is coming to an end. Wells Fargo & Company analyst Mike Mayo put it quite directly: "For the first half, it was almost like everyone was winning, and now that may no longer be the case. The divergence between winners and losers this quarter could be wider." Equities Carry the Load Alone, Fixed Income Falls to a Year-to-Date Low The strength in equity trading is the most certain bright spot in the third-quarter reports, with Goldman Sachs Group, Inc. expected to lead Wall Street's $19 billion in equity trading. Third-quarter equity trading revenue is expected to be $5.1 billion for Goldman Sachs Group, Inc., $4.9 billion for Morgan Stanley (MS.US), $4.5 billion for JPMorgan Chase, and $2.6 billion for Bank of America Corp (BAC.US); Wells Fargo & Company, against the backdrop of raising its net interest margin guidance during the quarter, achieved growth in both equity and fixed income trading revenue, roughly on par with Bank of America Corp. By contrast, the contraction in the fixed income business acts as a drag. The five largest banks are expected to report combined third-quarter fixed income revenue of more than $19 billion, below the more than $21 billion in the second quarter and potentially the lowest level of the year, partly because of an unusually high base last year. Rising rates are a double-edged sword for trading desks: they benefit lending businesses by having clients pay more interest, but they make life difficult for fixed income trading desks, because falling bond prices erode client market-making and positioning returns. Bank of America Corp's share price fell sharply at one point in mid-September precisely because Chief Executive Officer Brian Moynihan warned at the time that third-quarter fixed income trading revenue would decline; during the same period, Goldman Sachs Group, Inc. Chief Executive Officer David Solomon also acknowledged weak fixed income performance, while equity trading "remains strong." Capital Markets Business: Jefferies Financial Group Inc. Has Already Delivered the First Answer Jefferies Financial Group Inc. (JEF.US) was the first to report earnings in September, providing the market with its first reference sample: its investment banking and equity trading businesses set records, but fixed income trading net revenue fell 26% year over year. This set of data almost precisely foreshadows the script about to unfold for the major banks. Deutsche Bank expects investment banking fees for banks under its coverage to rise 7% year over year in the third quarter, slightly above Dealogic data (which shows the quarter was slightly softer than expected). By structure, equity capital markets business led growth with an 8% year-over-year increase, while M&A fell 7%, debt capital markets fell 6%, and syndicated loan revenue fell 26%. On a volume basis, globally announced M&A fell 1% year over year, completed M&A rose 12%, equity issuance rose 39% year over year, bond issuance rose 3%, and syndicated loans fell 18%. Deutsche Bank also has a slight downward bias on the weaker late-September activity levels. At the individual stock level, the market currently expects JPMorgan Chase's third-quarter investment banking fees to rise 15% year over year, Goldman Sachs Group, Inc. to rise 8.1%, and Morgan Stanley to rise 1.9%. Bank of America Corp analyst Ebrahim Poonawala offered a more direct judgment: 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: IPO Is the Only Bright Spot There is one buffer for the debt underwriting business: a refinancing "wall" over the next three years, and that demand is to some extent already embedded in the pipeline. Mayo said, "When it comes to debt underwriting, there is a refinancing wall over the next three years, and that is to some extent already built in." But he also warned that if rates continue to rise, it will hurt bond demand. The M&A pipeline has also shown signs of fatigue in recent weeks. In the three months through September, the value of announced M&A fell about 10% from a year earlier. Initial public offerings (IPOs) remain the brightest window this year in June, SpaceX completed a record-breaking listing, AI company Anthropic PBC is scheduled to meet with potential investors next week to prepare for an IPO; while Oura Inc. and CVC Capital Partners-backed Bamboo Insurance Services Inc. both postponed listing plans in September. JPMorgan Chase Chief Executive Officer Jamie Dimon hinted on Tuesday that there has been a slowdown compared with the first half, but that this slowdown has been more pronounced in the United States: "If you're talking about the IPO and M&A pipeline in Europe pretty good; if you're talking about the U.S., September was probably a bit slower." Net Interest Income: Divergence Is the Real Main Theme of the Third Quarter Deutsche Bank expects unusual rate moves to force some banks to raise and others to cut net interest income guidance. Deutsche Bank expects net interest income for banks under its coverage to rise 2% quarter over quarter on average and 8% year over year in the third quarter, but beneath the aggregate is sharp individual divergence. Behind this judgment is the surge in the third quarter of the 30-year RMBS current coupon rate by about 102 basis points, roughly three times the 37 basis point increase in the first half. Such a violent rate shift makes quarterly forecasting of the core metric "net interest income" especially difficult. Specifically, JPMorgan Chase may be the most direct beneficiary the bank habitually marks the forward curve to market in its net interest income guidance, and in July management gave fiscal 2026 guidance of $105.5 billion ($96.5 billion excluding the trading division). Deutsche Bank believes rate factors alone could bring more than $1 billion in annual benefit; the company discloses that for every 100 basis point rise in rates, its net interest income rises 1.7%. Bank of America Corp has 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 8.0% and believes the actual figure could be several hundred million dollars higher. Pressure is concentrated in several other banks. Truist (TFC.US) kept its fiscal 2026 guidance unchanged, but that guidance does not include the $5.5 billion auto loan sale from the end of the third quarter to the beginning of the fourth quarter, a transaction that will be 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 of prime auto loans in each of the third and fourth quarters, with actual loan runoff potentially exceeding the announced figure. U.S. Bancorp (USB.US) slightly raised its third-quarter net interest income guidance during the quarter, but Deutsche Bank cautions that the fourth quarter may be slightly weaker than expected due to a front-loaded drag from rate hikes the bank's medium- to long-term rate exposure is relatively neutral, but its liabilities reprice faster than its assets; management has also abandoned its goal of reaching a 3% net interest margin by 2027. Morgan Stanley's wealth management segment net interest income outlook may be slightly lowered, but Deutsche Bank believes this is not an important driver of overall company earnings. Most other banks will likely keep guidance unchanged: Fifth Third Bancorp (FITB.US) has raised its fiscal 2026 outlook, Huntington Bancshares (HBAN.US) has cut its fiscal 2026 and even 2027 guidance and provided target ranges under different rate scenarios, and Keycorp (KEY.US), M&T Bank Corporation (MTB.US), and Regions Financial Corporation (RF.US) all reaffirmed this year's guidance in September. Deutsche Bank is slightly more concerned about regional finance than the other two, because their guidance assumes that "historically low deposit beta" will persist, while management expects fourth-quarter deposit beta to rise to the high end of the 20% range. This Cycle Is Completely Different From the Last One Another key to understanding the third-quarter reports is that the operating environment of this rate-hiking cycle is almost the exact opposite of the 2022 cycle. Deutsche Bank lists four differences. First, the starting point for rate hikes is much higher. Before the first hike in this cycle, the federal funds target range was 3.50% to 3.75%, whereas in March 2022, when the previous cycle began, it was only 0 to 25 basis points, and both the magnitude and pace of hikes in this cycle are expected to be more moderate the current forward curve has already priced in close to four hikes, whereas on May 22 it had priced in only one to two. Second, capital is less exposed to rate shocks, reflecting higher capital levels and returns on capital, shorter securities portfolio duration, more interest rate swap hedging, and more securities classified as held-to-maturity rather than available-for-sale, thereby eliminating the mark-to-market nature of AOCI. Third, the deposit competition landscape is different. In 2022, banks faced excess deposits and weak loan growth, whereas today deposit market competition is intense but loan growth is strong. H8 data cited by Deutsche Bank shows (as of September 23) average loans up 1.2% quarter over quarter and up 7.3% year over year, with period-end deposits down 0.9% from June 30. Fourth, deposit costs remain low, with industry-wide deposit costs in the second quarter of 2026 at about 64% of the effective federal funds rate, well below the long-term average of 80% to 85% since 1984. Credit markets also warrant attention. In the third quarter, U.S. high-yield bond spreads widened by 37 basis points, of which 32 basis points occurred in the final week of the quarter, while European high-yield bond spreads widened by 56 basis points; since September 30, high-yield spreads have widened by another 5 to 10 basis points, while investment grade has been basically stable. Deutsche Bank notes that spread widening does not directly hit most banks' AOCI and capital, because banks have relatively small direct corporate bond exposure and loans are not marked to market, but it may have an impact through channels such as reducing loan origination volume, dragging on fixed income trading, and eroding credit quality over time. AOCI Shock: Pressure on the Capital Ledger The other side of rising rates is the structural erosion of capital adequacy, which is also the most core hidden thread in this quarter's earnings. Deutsche Bank estimates that in the third quarter, the 10-year U.S. Treasury yield rose 82 basis points from June 30 (spot basis), while the 30-year RMBS current coupon yield rose 102 basis points, the latter being a good proxy for bank securities portfolios. The change in 30-year RMBS rates alone will bring a capital shock of 40 to 45 basis points to large banks; under another measurement approach, Deutsche Bank estimates that rising rates pressure the average book capital of banks under its coverage, including AOCI adjustments, by about 51 basis points unrealized losses on available-for-sale securities directly reduce common equity tier 1 (CET1) through the AOCI line item. As Bloomberg pointed out, such shocks create "paper losses" that make earnings reports bumpy. Deutsche Bank introduces a new approach in its report: rather than only measuring available-for-sale securities gains and losses, it uses the actual change in AOCI during the first-half rate rise and multiplies it by a factor of 3 to extrapolate the third-quarter impact. Under both approaches, the industry average shock is broadly similar, but individual divergence is significant: investment banks (Goldman Sachs Group, Inc., Morgan Stanley) and money center banks (JPMorgan Chase, Bank of America Corp, Wells Fargo & Company) see noticeably reduced capital pressure, with Morgan Stanley and Wells Fargo & Company showing the largest adjustments; large regional banks diverge internally, with capital pressure declining at CFG, FITB, and USB, while capital losses at M&T Bank Corporation, Regions Financial Corporation, and Truist are actually higher. Deutsche Bank also emphasizes that banks under its coverage still have ample capital, enough to meet regulatory and rating agency requirements and to support loan growth the real constraint is not "whether there is enough," but "whether they are willing." Taking JPMorgan Chase as an example, its second-quarter CET1 reached 14.2%, the highest among money center banks. Deutsche Bank estimates that after a 60 basis point capital shock from rising rates, its pro forma capital level is about 13.6%, still 210 basis points above current regulatory requirements. For Wells Fargo & Company, Deutsche Bank expects its net interest margin excluding the trading division to be above the second-quarter estimate of 2.95% in 2027 and beyond. Buyback Pullback Becomes a High-Probability Event Although absolute capital still meets regulatory requirements, with rates rising rapidly, the outlook highly uncertain, and loan growth strong, Deutsche Bank judges that most banks will slow or even suspend buybacks. Deutsche Bank forecasts that banks under its coverage will repurchase a combined $31 billion in the third quarter ($28 billion in the second quarter), but has a downward bias on third- and fourth-quarter buybacks: only USB explicitly lowered third-quarter buyback guidance, but Deutsche Bank believes FITB has in fact also suspended buybacks, and other banks may likewise gradually scale back. In terms of specific pace, money center banks (JPMorgan Chase, Bank of America Corp, Wells Fargo & Company) will most likely "slow down without stopping"; while of the 9 large regional banks covered by Deutsche Bank, 7 already have pro forma capital at or below 9.0% after including AOCI, and will most likely suspend buybacks outright. Deutsche Bank expects buybacks to return to mid-single-digit growth only after rates stabilize, and if regulatory capital rules are finalized and Federal Reserve stress tests are eased, buybacks still have upside. AI Shadow: Has the Panic Trade Been Overpriced Beyond earnings themselves, bank stocks in the third quarter also bore an additional layer of pressure market concerns about artificial intelligence, and concerns that AI agents could siphon deposits out of the banking system. Morgan Stanley analyst Manan Gosalia said, "The stocks have pulled back notably on concerns about slower capital markets revenue growth this quarter, concerns about higher funding costs, and concerns about AI-driven cash optimization tools." The third quarter became the worst quarter for the KBW Bank Index since the first quarter of 2023 (when the U.S. regional banking crisis began to spread), and Morgan Stanley analyst Gosalia and Wells Fargo & Company analyst Mike Mayo both believe this round of "panic trading" has been overpriced. But the sell side broadly believes this "panic trade" has gone too far. Gosalia pointed out, "The entire AI investment cycle is a multi-year investment cycle, and it is not limited to hyperscalers; it will continue to support capital markets for years to come." Both Mayo and Gosalia believe that with Wall Street about to deliver another strong quarter, cheap stock valuations may prove to be investors' winning point. Gosalia said plainly: "We view this pullback as an attractive entry point." (As of publication, Citigroup led gains, while Bank of America Corp's share price may end the year lower.) Conclusion: A High-Volume, Low-Certainty Earnings Season Taken together, the picture for the third-quarter reports is already quite clear. The bright spots on the revenue side are concentrated in equity trading and equity capital markets; investment banking fees and net interest income can still post mid- to high-single-digit year-over-year growth on average; credit costs are moderate; and equity trading revenue will set a record close to $19 billion. But the pressures are also concentrated and directionally consistent: fixed income revenue hits a year-to-date low, announced M&A value falls about 10% year over year, AOCI unrealized losses depress common equity tier 1, and on top of that the AI narrative weighs on valuations. At the end of September, Deutsche Bank downgraded M&T Bank Corporation, PNC, and Regions Financial Corporation due to increasingly full valuations combined with high-rate concerns, and this quarter's earnings will provide the first answer to those judgments. On specific names, Deutsche Bank maintains JPMorgan Chase, Wells Fargo & Company, and Huntington Bancshares as top picks: JPMorgan Chase wins on capital thickness (pro forma 13.6%, 210 basis points above regulatory requirements) and net interest income elasticity (+1.7% for every 100 basis points), with the variable to watch closely being expense guidance; Wells Fargo & Company wins on margin and expense discipline, and the company may disclose net interest margin guidance excluding the trading division for the first time; Huntington Bancshares wins on expectation gap and valuation discount, with its share price at only 8.7 times the low end of its new fiscal 2027 earnings per share target range, while peers trade at 10 times on 2027 consensus estimates. Deutsche Bank's summary is: bank capital remains abundant, but uncertainty over the rate path is leading management teams to move "buying back more stock" away from the top of the capital allocation table.