Oppenheimer, a US investment bank, warned clients on Friday that the upcoming September-quarter earnings season could be rough for the nation's largest banks. The culprit: dealmaking and trading revenue, which appears to be tracking weaker than many analysts had assumed.
The broker trimmed its earnings-per-share (EPS) forecasts for six major lenders—Goldman Sachs, Morgan Stanley, Bank of America, Citigroup, and US Bancorp—citing softer-than-hoped capital markets activity. At the same time, it nudged its estimate for JPMorgan Chase higher, suggesting the banking giant is still on track to beat consensus expectations.
What's behind the downgrades?
According to Oppenheimer analysts Chris Kotowski and John Coffey, the "plain vanilla" parts of banking—loan growth, credit quality, and operating expenses—haven't changed much. The problem lies in the more volatile, market-sensitive businesses: investment banking fees, trading revenue, and other capital markets income.
These revenue streams have been a bright spot for banks over the past year, as a rebound in dealmaking and a busy trading environment boosted profits. But the third quarter appears to have cooled. With fewer mergers, IPOs, and bond issuances than expected, the revenue that banks earn from advising on deals and underwriting securities is coming in at the low end of the range.
For everyday investors, this matters because capital markets revenue is a key driver of earnings for the biggest Wall Street banks. When it disappoints, it can drag down the entire sector's results, even if consumer banking and lending remain steady.
JPMorgan stands apart
Oppenheimer's decision to raise its forecast for JPMorgan highlights the bank's reputation as a diversified powerhouse. While its investment banking arm is exposed to the same market headwinds, JPMorgan's massive consumer banking franchise, credit card business, and wealth management operations provide a buffer that many peers lack.
The broker now expects JPMorgan to be the only one of the six to beat consensus EPS estimates for the September quarter. That's a notable vote of confidence, especially as investors brace for a mixed earnings season across the financial sector.
What it means for investors
For those holding bank stocks, the takeaway is to expect some volatility as earnings season kicks off. Banks are often the first major companies to report, and their results set the tone for the broader market. If capital markets revenue disappoints, it could weigh on sentiment not just for banks, but for other financial firms like asset managers and exchanges.
It's also worth remembering that EPS forecasts are just estimates. Banks have a history of managing expectations, and actual results can still surprise. But Oppenheimer's caution suggests that investors should be prepared for a less rosy picture than some hoped.
The broader economic backdrop adds another layer. Recent jobs data showing a cooling labor market has fueled hopes that the Federal Reserve will cut interest rates, which could eventually boost dealmaking and lending. But those effects take time to show up in bank earnings.
For now, the focus will be on what bank executives say about the pipeline for deals and trading in the coming months. If they signal that the slowdown is temporary, investors may shrug off the weak quarter. If not, the sector could face further pressure.
Looking ahead
As the September-quarter earnings season unfolds, all eyes will be on the big banks. JPMorgan is typically the first to report, and its results will offer an early read on the health of the financial system. The other five banks will follow, and their commentary on capital markets activity will be closely scrutinized.
Investors should also keep an eye on how these results interact with the broader market. A tough earnings season for banks could ripple through other sectors, especially if it signals that the economy is slowing more than expected. On the other hand, if banks manage to beat the lowered bar, it could provide a boost to confidence.
In the meantime, Oppenheimer's warning serves as a reminder that even the most stable-looking industries can face headwinds. For everyday investors, the key is to stay diversified and not overreact to a single quarter's results.
