US bank profits will be tested by interest and inflation next week

Major US banks are entering the season of announcing third-quarter results amid a new test of the earnings momentum that supported their performance in the first half of the year, with bond yields rising and inflationary pressures rising, at a time when markets are awaiting indications of the impact of financing costs on lending, consumer spending and deal activity.

JP Morgan Chase, Goldman Sachs, and Citigroup will begin announcing their results (Tuesday), and Bank of America and Morgan Stanley will announce their results (Wednesday).

These results are important beyond the performance of the banks themselves, as they provide indicators of the conditions of consumers and companies, trends in capital markets, and the ability of the US economy to continue growth in light of rising borrowing costs.

After strong results in the first half, analysts expect bank profits to decline compared to the second quarter, with some exceptional revenues from trading, deal-making and financing receding. However, expectations still indicate annual profit growth for most major banks, according to estimates reported by media reports.

Bond yields put pressure on bank stocks

US bank stocks have declined in recent weeks as Treasury bond yields have risen, a reflection of investors' concern about financing costs remaining at high levels and their impact on stock valuations and market activity.

The five largest American banks lost about $270 billion in market value, compared to the peaks their shares recorded during the summer, until Friday’s close, according to a Yahoo Finance report. The index of banks included in the Standard & Poor's 500 index also fell by about 7.5 percent during the previous month, according to Reuters.

The sector faces a complex equation; High interest rates may support returns on new loans, but it also raises the cost of deposits and financing from wholesale markets, puts pressure on the value of some investment portfolios, and makes financing acquisitions and mergers more expensive.

Attention is turning to the comments of executive departments regarding lending margins and the cost of deposits, especially with the intensification of competition between American banks to attract customer funds. Brendan Coughlin, Chairman of Citizens Financial Group, said that growing loans has become easier than attracting deposits, which increases pressure on the cost of financing.

Inflation puts the interest rate path under the microscope

The importance of the results week is not limited to the performance of banks, as markets are also awaiting data on consumer and producer prices and retail sales, searching for new signals about the path of inflation and spending in the United States.

The September consumer price report, due Wednesday, is expected to show a year-over-year rise in prices, with oil prices returning to above $100 a barrel and fuel costs continuing to rise. Increased energy prices add pressure on household budgets and corporate costs, and may complicate efforts to contain inflation.

The Federal Reserve raised the key interest rate last month for the first time since 2023, in an attempt to contain price pressures. Inflation and retail sales data will help determine whether markets will reprice their expectations for upcoming decisions, including the central bank meeting on October 27-28.

The yield on ten-year US Treasury bonds exceeded 5 percent, recording historically high levels in the recent period. Higher yields increase the attractiveness of bonds compared to stocks, and also raise the discount rate used in valuing assets, which may limit the ability of stocks to continue rising.

Transaction activity and artificial intelligence

While trading revenues may decline from the strong levels recorded during the first half, financing investment in artificial intelligence remains a promising area for banks, through loans, issuances of shares and bonds, and advisory services related to mergers and acquisitions.

But rising financing costs are beginning to pose challenges for some companies seeking to enter public markets. Companies have postponed plans for an initial offering, while Firmware Grid, which is backed by Nvidia, abandoned its listing plans this week after investors expressed reservations about the proposed valuation.

These developments indicate that strong demand for AI infrastructure financing does not mean that deals will continue at the same pace, especially if bond yields continue to rise or companies become more conservative in their valuations.

Thus, bank results and inflation data during the week will present a coherent picture of three main factors moving US markets: the ability of the banking sector to protect its profit margins, the extent of consumers’ resilience to rising prices, and whether borrowing costs will begin to slow corporate and market activity.