Major U.S. bank stocks are hovering in technical correction territory as the earnings season opens on Tuesday, with long-term borrowing costs climbing to their highest levels in decades, putting intense focus on what bank executives will say about the health of American consumers and the outlook for credit.
According to compiled analyst estimates, the largest Wall Street banks are expected to report roughly $19 billion in quarterly equity trading revenue. At the same time, lending volumes are projected to grow year-over-year, and credit quality is expected to remain stable.
However, the KBW Bank Index, a industry benchmark, has fallen about 12% since its mid-August peak, exceeding the 10% threshold that defines a technical correction. This decline has coincided with a surge in Treasury yields and the Federal Reserve's first rate hike in three years, and the index is on track for its worst quarterly performance since early 2023—when a similar rise in yields triggered a regional banking crisis and dealt a heavy blow to bank stocks.
This has forced banks to strike a balance between the costs they pay on deposits and the income they earn on loans, while violent swings in the bond market add further pressure. Matt Miskin, a strategist at Manulife John Hancock Investments, noted that rising interest rates on credit cards, auto loans, and mortgages are creating additional strain on banks. "Higher yields can bring better revenue, but they can also reach a tipping point where consumers are unable to repay those loans," he said.
Currently, the 10-year U.S. Treasury yield is steady near 5.2%, having earlier touched its highest level since 2002. The 30-year Treasury yield has risen to around 5.6%, also approaching a more than two-decade high. Minutes from the Fed's September meeting showed that all 19 policymakers supported the September rate hike, with most believing further tightening would be needed this year, and markets are pricing in about a 70% probability of a December rate increase.
Strong Earnings Expectations, But Mixed Market Sentiment
Despite the pressure on share prices, analysts still expect large banks to post year-over-year earnings growth of as much as 20% in the third quarter, with investment banking and trading revenue improving significantly from the previous quarter and no signs of deterioration in credit portfolios.
Last month, Jefferies (JEF.US), which reported earlier than its peers, said its investment banking and equity trading divisions experienced a record quarter, though other metrics were mixed.
Specifically: JPMorgan Chase (JPM.US) is expected to report earnings per share of $5.94, up about 17% from $5.07 a year earlier, with revenue projected to rise from $47.1 billion to $51.2 billion. Co-President Doug Petno previously said investment banking fees and trading revenue are expected to grow in the "mid-to-high double digits."
Goldman Sachs (GS.US) is expected to report earnings per share of about $12.44 on revenue of roughly $16.8 billion, compared with $12.25 and $15.2 billion a year earlier. Chief Executive David Solomon previously warned investors that fixed income, currencies, and commodities would be relatively weak, while equities are expected to remain strong.
Bank of America (BAC.US) is expected to report earnings per share of $1.10, slightly above $1.06 a year earlier, with revenue projected to reach $30.55 billion. But Chief Executive Brian Moynihan previously warned that investment banking fees are expected to fall at least 10% year-over-year, sending the stock sharply lower. "We have a very small position in some of the more active businesses, so the decline could be even larger," he said.
Citigroup (C.US) is expected to report earnings per share of $2.41 on revenue of $23.72 billion. Chief Financial Officer Gonzalo Luchetti previously said the bank expects its return on tangible common equity to be slightly above its 11% target this year and will increase the size of share buybacks in 2026.
Wells Fargo (WFC.US) is expected to report earnings per share of $1.85 on revenue of $22.32 billion. Chief Financial Officer Mike Santomassimo said loan growth in 2026 is expected to be better than previously anticipated, and U.S. consumer and credit trends remain healthy.
Morgan Stanley (MS.US) is expected to report earnings per share of $2.94 on revenue of $20.11 billion. Co-President Dan Simkowitz noted that the bank's investment banking pipeline still looks solid and that companies remain in the middle of an AI investment cycle.
Four banks—Citigroup, Goldman Sachs, JPMorgan, and Wells Fargo—will report before the U.S. market opens on Tuesday, while Bank of America and Morgan Stanley are scheduled to report on Wednesday.
Cooling IPO Market Deepens Investment Banking Concerns
But the surge in bond yields has clearly dampened capital markets activity. At the end of the third quarter, smart ring maker Oura and SoftBank-backed AI data center developer SB Energy successively postponed their IPO plans. According to Renaissance Capital, seven companies announced delays or withdrawals of listing plans in the third quarter, up from four in the second quarter and three in the first quarter.
Only 30 IPOs were completed in the third quarter, the lowest in ten quarters, raising a total of $32.8 billion—well below the 48 deals in the second quarter and the average of 49 in third quarters over the past decade.
UBS bank analyst Erika Najarian noted in a client report that weakness in bank stocks is directly tied to the surge in yields, and investors need reassurance that capital markets pipelines remain adequate, loan growth is on track, and rising deposit costs are manageable.
Cheryl Pate, a senior portfolio manager at Angel Oak Capital Advisors, believes investors will focus on guidance regarding credit growth and deposit costs. "We do not expect large-scale deposit outflows—where customers chase higher yields—nor do we expect a sharp rise in deposit costs," Pate said. She also noted that despite the recent rise in rates, analysts do not expect banks to face unrealized losses on securities portfolios again like during the 2023 banking crisis. "Most banks have since shortened portfolio duration and managed the related risks."
AI 'Panic Trade' and Midterm Election Risks
Beyond interest rates, bank stocks face multiple unconventional risks. The potential disruption of artificial intelligence (AI) agents to traditional bank deposit and lending business models, as well as policy uncertainty from the November midterm elections, have become focal points for investors.
JPMorgan analysts previously predicted that an unexpected landslide victory by Republicans could benefit lenders such as Bank of America, Citigroup, and Wells Fargo, as Republicans have historically favored looser regulation of the financial industry. But polls show Republicans are losing ground amid voter dissatisfaction with the economy and the war with Iran.
Miskin of Manulife noted that sectors such as banks and industrials, which "have historically benefited more from Republican policies," have shown recent weakness, possibly indicating that the market is pricing in expectations of a sweeping Democratic victory.
On the AI front, Meta's (META.US) recent launch of the consumer AI agent Muse sparked concerns that AI agents could erode banks' deposit base and wealth management businesses, briefly triggering an AI "panic trade" in bank stocks.
A report from research firm Citrini Research provided a theoretical framework for this panic. The report offered a chilling conclusion for the banking industry: a substantial portion of U.S. banking profits is built on customer "inertia"—consumers keep money in low-interest accounts for convenience and habit, allowing banks to obtain funds at extremely low cost and invest them in higher-yielding assets.
In a subsequent report titled "Breaking The Wall," Citrini Research further argued that autonomous AI agents will operate programmatically, around the clock, and across applications, and that money and financial assets will ultimately flow in the same way, which will significantly increase demand for programmable financial infrastructure.
Torsten Slok, chief economist at Apollo Global Management, conceptualized this threat as an "agentic bank run." In a September report, he noted that AI assistant agents like Muse could soon automatically move household cash from checking accounts paying an average of just 0.1% into fintech accounts yielding between 3.3% and 5.0%.
"If every household uses an AI agent to optimize cash returns, banks could lose a massive amount of cheap deposits they use for lending, and that would be a problem for the entire financial system," Slok wrote in the report.
Institutional Views Diverge: Buy the Dip or Reduce Exposure?
Faced with the deep correction in bank stocks, Wall Street analysts are clearly divided. Wells Fargo analyst Mike Mayo holds a relatively optimistic stance. In a September report, he noted that the midterm elections could "have some impact on deregulation, but will not derail it," and predicted the AI "panic trade" will reverse as banks report earnings, because "banks' moat of trust is the safeguard for deposits."
This means that while AI agents are technically capable of executing fund transfers, whether consumers are willing to hand over financial control to tech companies known for "moving fast and breaking things" remains a major obstacle. Bank of America Global Research holds a similar view, noting that while Muse's popularity is notable, there is no indication so far that users are willing to give AI agents their financial account login credentials.
A Truist investor survey conducted in late September showed that more than half of bank investors still consider Fed rate hikes the biggest risk to valuations, with only a very small number mentioning the AI agent threat. Morgan Stanley analyst Manan Gosalia called the recent selloff an "attractive entry point," advising investors to use it to position for stronger performance in 2027.
He noted that AI-related investment and an overall resilient economy will support bank stocks, and while higher rates increase banks' funding costs, "revenue should rise at the same time." However, CIBC Capital Markets strategist Christopher Harvey takes a more cautious stance. He expects bank executives to be more circumspect about consumer health and the economic outlook than they were a few months ago.
Still, he believes the sector could see a "relief rally"—bank stocks often rebound after earnings when they have lagged beforehand. But he added that if such a rally occurs, "we will use it as an opportunity to reduce exposure," preferring communication services and utilities over financials given the macro headwinds companies face.
In the options market, traders held a bullish bias on JPMorgan, the largest U.S. bank, ahead of its earnings. Late last week, trading showed demand for call options betting on a 10% gain exceeding demand for protection against a 10% decline, with more outstanding call contracts than puts, a potential bullish signal. However, the options market's implied expectation for JPMorgan's post-earnings stock swing is about 3.57%, above its actual average move of 2.36% after earnings over the past four quarters.
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