US Banks’ Earnings Season: Optimism Tested as Wild Cards Loom

Investors entered 2025 with optimism about US banks, fueled by record profits and easing regulations under a Republican administration. However, the first earnings reports from major banks this week will test that optimism as Wall Street braces for potential headwinds like inflation, interest rate uncertainty, and shifting economic conditions.
Fourth Quarter Results: Expectations and Concerns
The fourth quarter of 2024 is expected to bring mixed results for major banks. On one hand, banks like JPMorgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC), Citigroup (C), Goldman Sachs (GS), and Morgan Stanley (MS) are likely to report profit increases for both the full year and the quarter compared to the same period in 2023.
Yet, compared to the third quarter of 2024, profits for these banks are expected to decline. Factors contributing to this include higher unrealized losses on bond portfolios, weaker fixed-income trading revenues, and ongoing economic uncertainty.
Rate Cuts and Inflation: A Double-Edged Sword
The Federal Reserve’s 2024 rate cuts have left rates high enough to preserve healthy lending margins while easing pressure on borrowers. However, concerns about inflation and long-term rate hikes in 2025 are creating uncertainty.
Longer-term rates, which have risen due to inflationary pressures, are both an opportunity and a risk for banks:
- Opportunities: Higher rates allow banks to charge more for loans, boosting net interest income (the difference between what banks earn on loans and pay on deposits).
- Risks: Higher rates could exacerbate unrealized losses in bond portfolios, depress fixed-income trading revenue, and strain corporate borrowers.
Dealmaking and Regulatory Changes
A resurgence in corporate dealmaking is a bright spot for banks. Companies are issuing debt at record levels, and initial public offerings (IPOs) are gaining momentum. In addition, the Trump administration is expected to roll back proposed capital rules that could have restricted bank profitability.
These developments create a favorable environment for Wall Street giants, though the sustainability of this trend will depend on broader economic conditions and regulatory clarity.
Analyst Outlooks
Bank analysts remain cautiously optimistic:
- Scott Siefers (Piper Sandler) noted a generally positive outlook but acknowledged the unpredictability of the interest rate environment.
- Mike Mayo (Wells Fargo) highlighted net interest income as a key growth driver for banks, particularly if long-term rates remain below 5%-6%. However, he cautioned that higher rates could hurt the broader economy.
- Bill Demchak (PNC Financial Services) acknowledged the profitability of higher rates but warned of the economic damage they could cause if they rise too high.
The Road Ahead
US banks are entering 2025 with optimism, but wild cards like inflation, rate hikes, and economic uncertainty could challenge the industry. While record profits and easing regulations provide a solid foundation, investors and analysts are keenly watching this earnings season for signs of how banks will navigate the complex landscape ahead.
As one analyst put it: “Choo choo, the train is taking off, but mind the gap so you don’t break a leg or anything.”