Q3 Bank Earnings: Muddier Waters to Navigate

Higher Treasury yields, a potentially more hawkish Federal Reserve, and weaker investment-banking activity are likely to slow but not reverse U.S. banks’ earnings growth.

• The S&P 500 financials sector returned less than the broader market in the third quarter, while the KBW Nasdaq Bank Index fell more than 8% in September after reaching a record high in mid-August.
• FactSet expects third-quarter financials earnings growth of 3.3% year over year, down from 21.9% in the second quarter, with revenue growth slowing to 7.4% from 14.2%.
• A further Fed hike appears likely: CME futures implied roughly 90% odds of another increase before year-end, while core PCE inflation stood at 3% in August versus the Fed’s 2% target; the curve could flatten and pressure net interest income.
• Investment banking faces weaker IPO and capital-spending demand: OpenAI delayed its potential $1.4 trillion IPO, Anthropic’s listing could be postponed, and Bank of America cut its third-quarter investment-banking revenue outlook to $1.6–$1.8 billion from expectations near $2 billion.
• Higher rates could reduce mortgage and corporate borrowing, with 30-year mortgage rates above 7% and the 10-year Treasury yield near its highest level since 2002, although GDPNow estimated third-quarter growth at 3.7% and credit spreads remained narrow.

Takeaway: Investors should focus on fourth-quarter net interest income guidance, loan-loss provisions, loan demand, trading revenue, and signs of private-credit stress; resilient economic data may cushion banks, but weaker guidance could set a negative tone for earnings season.