The Zhitong Finance App noticed that a number of major Wall Street banks will begin the third quarter earnings disclosure period next week. Taken together, the core contradiction of this quarter's earnings report is very clear: revenue from stock trading will generate historical volumes, but under the triple pressure of declining fixed income, cooling capital market activity, and AOCI (cumulative other comprehensive income) losses, the differentiation among bank stocks will be far more significant than in the first half of the year.
The bank earnings season will begin on October 13, and Goldman Sachs (GS.US), J.P. Morgan Chase (JPM.US), and Wells Fargo (WFC.US) will take the lead in disclosing before the market starts. According to analyst data from the Zhitong Finance App, the total stock trading revenue of the largest Wall Street banks in the third quarter is expected to be close to 19 billion US dollars, and the contraction in the fixed income business is a drag.
This combination means that the first half of “everyone wins” is coming to an end. Wells Fargo analyst Mike Mayo put it quite bluntly: “For the first half of the year, it was almost like everyone was winning, but now that's probably not the case anymore. The divide between winners and losers this quarter is likely to be wider.”
Stocks took the lead, and fixed income fell to a low point during the year
The strength of the stock trading business is the most definite highlight in the three-quarter report. Goldman Sachs is expected to lead Wall Street's 19 billion dollar stock trading.
Goldman Sachs stock trading revenue for the third quarter is expected to be 5.1 billion US dollars, Morgan Stanley (MS.US) is 4.9 billion US dollars, J.P. Morgan Chase is 4.5 billion US dollars, and Bank of America (BAC.US) is 2.6 billion US dollars; in the context of net interest spread guidelines during the quarter, both stock and fixed income transaction revenue increased, roughly the same as Bank of America.
In contrast, the contraction in the fixed income business was a drag. The fixed income business of the five largest banks is expected to generate more than 19 billion US dollars in the third quarter, down from more than 21 billion US dollars in the second quarter, and may hit the lowest level in the year. This is partly due to the high base last year.
Rising interest rates are a double-edged sword for trading desks: it favors the lending business through customers paying more interest, but it makes fixed income trading desks difficult because falling bond prices erode clients' market-making and position earnings. Bank of America's stock price plummeted in mid-September because CEO Brian Moynihan warned at the time that fixed income transaction revenue would decline in the third quarter; Goldman Sachs CEO David Solomon also acknowledged that fixed income performance was weak, and stock trading was “still strong.”
Capital Markets Business: Jefferies has handed over the first questionnaire
Jefferies (JEF.US) was the first to disclose financial reports in September, providing the market with the first reference sample: its investment banking and stock trading business set records, but net revenue from fixed income transactions fell 26% year over year. This set of data almost accurately indicates a major screenplay that is about to begin.
Deutsche Bank expects investment banking expenses of covered banks to increase 7% year-on-year in the third quarter, slightly higher than Dealogic data (the latter shows that the quarter was slightly weaker than expected). Structurally, the equity capital market business led growth with an 8% year-on-year increase, while the merger and acquisition business declined 7%, the debt capital market fell 6%, and syndicated loan revenue fell 26%. In terms of transaction volume, the world has announced a 1% year-on-year decrease in the scale of mergers and acquisitions, a 12% increase in completed mergers and acquisitions, a 39% year-on-year increase in equity issuance, a 3% increase in bond issuance, and an 18% decrease in syndicated loans. Deutsche Bank also had a slight downward bias against weak activity in late September.
At the individual stock level, the market currently expects J.P. Morgan Chase's investment banking expenses to increase by 15% year-on-year in the third quarter, Goldman Sachs by 8.1%, and Morgan Stanley by 1.9%. Bank of America analyst Ebrahim Poonawala gave a more direct judgment: capital market activity in the second half of 2026 will be “significantly weaker” than in the first half of the year, which has raised questions about the “sustainability of the current capital market cycle.”
Distribution channel: IPO is the only bright color
The debt underwriting business has a buffer: there will be a refinancing “wall” for the next three years, and this part of the demand is embedded in the pipeline to some extent. Mayo said, “When it comes to debt underwriting, there's a refinancing wall for the next three years, which is already built in to some extent.” But at the same time, he warned that if interest rates continue to rise, it will hurt demand for bonds.
The merger and acquisition pipeline has also shown fatigue in recent weeks. In the three months ending September, the value of announced mergers and acquisitions decreased by about 10% compared to the same period last year. The initial public offering (IPO) is still the brightest window of the year — SpaceX completed a record listing in June, artificial intelligence company Anthropic PBC is scheduled to meet with potential investors next week to prepare for the IPO; while Oura Inc. and Bamboo Insurance Services Inc. supported by CVC Capital Partners, both postponed their listing plans in September.
J.P. Morgan CEO Jamie Dimon hinted on Tuesday that there was a slowdown compared to the first half of the year, but this slowdown was more evident in the US: “If you talk about Europe's pipeline of IPOs and mergers and acquisitions — pretty good; if you talk about the US, it probably slowed down a bit in September.”
Net interest income: differentiation was the real main line in the third quarter
Deutsche Bank expects that changes in interest rates will force some banks to raise and some banks to lower their net interest income guidelines. Deutsche Bank expects the net interest income of banks within its coverage to increase by an average of 2% month-on-month and 8% year-on-year in the third quarter, but there is severe individual differentiation below the total volume.
Behind this judgment, the 30-year RMBS turnover rate soared by about 102 basis points in the third quarter, about 3 times the 37 basis point increase in the first half of the year. Such drastic interest rate shifts have made quarterly forecasting the core indicator of “net interest income” extremely difficult. Specifically, J.P. Morgan Chase is likely to be the most direct beneficiary — the bank habitually includes forward curves in net interest income guidelines at market prices. The 2026 guidance given by management in July was 105.5 billion US dollars (96.5 billion US dollars after excluding the trading department). Deutsche Bank believes that interest rate factors alone can bring annual income of more than 1 billion US dollars; for every 100 basis points of increase in interest rates, the company's net interest income rises 1.7%. Bank of America has a slight upward bias. The management currently guides the 2026 net interest income growth rate as the upper limit of the 6% to 8% range. Deutsche Bank assumes 8.0%, and believes that the actual value may still be hundreds of millions of dollars higher.
The pressure is concentrated on a few others. Truist (TFC.US) maintained its FY2026 guidelines, but the guidelines did not include the sale of $5.5 billion in auto loans from the end of the third quarter to the beginning of the fourth quarter. The deal will be a drag in the fourth quarter. At the same time, the company has announced that it will withdraw from subprime automobile, motorhome and ship loans and amortize $1 billion of high-quality car loans in each quarter of the third and fourth quarters. The actual loan loss may have exceeded the announced level. The United States Bank of America (USB.US) slightly raised its net interest income guidance for the third quarter during the quarter, but Deutsche Bank indicated that the fourth quarter may be slightly weaker than expected due to an upfront drag caused by interest rate hikes — the bank's medium- to long-term exposure to interest rates is relatively neutral, but the debt side is priced faster than on the asset side; management has also abandoned the goal of reaching 3% net interest spreads in 2027. The net interest income outlook for Morgan Stanley's wealth management division may be lowered slightly, but Deutsche Bank believes this is not an important driver of the company's overall profit.
Most of the remaining banks are likely to keep their guidance unchanged: Bank Five Three (FITB.US) has raised its 2026 outlook, Huntington Bank (HBAN.US) has lowered its 2026 and even 2027 guidance and provided target ranges that include different interest rate scenarios. Keycorp (KEY.US), Commercial Bank of America (MTB.US), and Regional Finance (RF.US) all reaffirmed this year's guidance in September. Deutsche Bank is slightly more concerned about regional finance than the other two, as its guidelines assume that the “historically low deposit beta” will continue, and management expects the deposit beta to rise to a high 20% range in the fourth quarter.
The cycle of this round is very different from the previous round
Another key to understanding the three-quarter report is that the operating environment for this round of interest rate hikes is almost completely opposite to the 2022 round. Deutsche Bank listed four differences.
First, the starting point for interest rate hikes is much higher. Before the first rate hike in this round, the federal funds target range was 3.50% to 3.75%, compared to only 0 to 25 basis points when the last round started in March 2022, and the magnitude and pace of this round of rate hikes are expected to be more moderate — the current forward curve has included close to 4 rate hikes, while on May 22, only 1 to 2 times were included. Second, capital is less affected by interest rates. This reflects higher capital levels and return on capital, shorter portfolio terms, more interest rate swaps and hedging, and more securities being placed into accounts held until maturity rather than saleable accounts, thus eliminating AOCI's market-watching nature. Third, the competitive pattern for deposits is different. Banks faced excess deposits and weak loan growth in 2022. Today, the deposit market is competitive but loan growth is strong. The H8 data quoted by Deutsche Bank showed (as of September 23) that average loans increased 1.2% month-on-month and 7.3% year-on-year, and end-of-period deposits fell 0.9% from June 30. Fourth, deposit costs are still low. In the second quarter of 2026, deposit costs for the entire industry were about 64% of the effective federal funds rate, which is significantly lower than the long-term average of 80% to 85% since 1984.
The credit market also needs attention. Interest spreads on US high-yield bonds widened by 37 basis points in the third quarter. Of these, 32 basis points occurred in the last week at the end of the quarter, and spreads widened by 56 basis points on European high-yield bonds; since September 30, interest spreads widened by 5 to 10 basis points, and the investment level is basically stable. Deutsche Bank suggests that widening interest spreads do not directly impact the AOCI and capital of most banks. Because banks directly hold less exposure to corporate bonds and loans are not measured at market price, they may have an impact through channels such as depressing loan investment, dragging down fixed income transactions, and eroding credit quality over time.
AOCI shock: capital books under pressure
The other side of rising interest rates is the structural erosion of capital adequacy ratios. This is also the core dark line of this three-quarter report. According to Deutsche Bank estimates, the yield on 10-year US Treasury bonds in the third quarter was 82 basis points higher than on June 30 (spot caliber), and the 30-year RMBS turnover yield increased 102 basis points. The latter is a good proxy indicator for bank securities portfolios. The 30-year RMBS interest rate change alone will have a capital impact of 40 to 45 basis points for major banks; under another set of measures, Deutsche Bank's estimated interest rate will put an average pressure of about 51 basis points on the bank's book capital covered by AOCI adjustments — the floating loss of marketable securities portfolios will directly depress core Tier 1 capital (CET1) through AOCI accounts. As Bloomberg pointed out, such shocks can create “paper losses,” making profit reports bumpy.
Deutsche Bank introduced a new algorithm in the report: it no longer only measures the profit and loss of marketable securities, but instead uses actual changes in AOCI during the first half of the year when interest rates rose and multiplied by a factor of 3 to extrapolate the impact of the third quarter. The average impact of the industry under the two algorithms is roughly close, but individual differentiation is significant: capital pressure on investment banks (Goldman Sachs, Morgan Stanley) and central banks (J.P. Morgan Chase, Bank of America, Wells Fargo) was significantly reduced. Among them, Morgan Stanley and Wells Fargo Bank adjusted the most; large regional banks were internally segmented, and capital pressure on CFG, FITB, and USB declined, while capital losses for American banks, regional finance, and Truist were even higher.
Deutsche Bank also emphasized that banks within the coverage area still have sufficient capital, which can not only meet the requirements of regulators and rating agencies, but also support loan growth — the real constraint is not “sufficient”, but “willing or not”. Taking J.P. Morgan Chase as an example, its CET1 reached 14.2% in the second quarter, the highest among monetary central banks. Deutsche Bank estimated that after the 60 basis point capital shock caused by rising interest rates, the formal capital level was about 13.6%, which is still 210 basis points higher than current regulatory requirements. As for Wells Fargo, Deutsche Bank expects its net interest spread excluding the trading sector to be higher than the 2.95% estimate for the second quarter in 2027 and beyond.
The decline in buybacks is a probable event
Although absolute capital still meets regulatory requirements, interest rates are rising rapidly, prospects are highly uncertain, and superimposed loan growth is strong. Deutsche Bank believes that most banks will slow down or even suspend repurchases. Deutsche Bank's forecast covers a total of 31 billion US dollars of repurchases in the third quarter (28 billion US dollars in the second quarter), but it has a downward bias for the third and fourth quarters: only USB clearly lowered the repurchase guidelines for the third quarter, but Deutsche Bank believes that FITB has actually suspended repurchases, and other banks may also shrink one after another.
At the exact pace, the central banks of the Monetary Center (J.P. Morgan Chase, Bank of America, Wells Fargo) are likely to “not stop slowing down”; of the 9 large regional banks covered by Deutsche Bank, 7 have simulated capital at or below 9.0% after being included in AOCI, which is likely to directly suspend repurchases. Deutsche Bank expects that repurchases will only return to mid-single-digit growth after interest rates stabilize, and if regulatory capital rules are implemented and the Federal Reserve's stress tests are relaxed, there is still room for upside in repurchases.
AI shadows: whether panic deals are being overpriced
In addition to the results themselves, bank stocks were under an additional layer of pressure in the third quarter — market concerns about artificial intelligence and concerns that AI agents might drain deposits out of the banking system. Morgan Stanley analyst Manan Gosalia said, “Related stocks have clearly recovered due to concerns about slowing capital market revenue growth this quarter, concerns about higher financing costs, and concerns about AI-driven cash optimization tools.” The third quarter was the worst quarter for the KBW Bank Index since the first quarter of 2023 (when the US regional banking crisis began to spread), and Morgan Stanley analyst Gosalia and Wells Fargo analyst Mike Mayo both believe that this round of “panic trading” has been overpriced.
However, sellers generally believe that this “panic deal” has gone too far. Gosalia pointed out, “The entire AI investment cycle is a multi-year investment cycle, and it is not limited to hyperscale cloud vendors; it will continue to support the capital market for years to come.” Mayo and Gosalia both believe that in a context where Wall Street is about to hand over another strong quarter, cheap stock valuations may be a winning point for investors. Gosalia said bluntly: “We think this round is an attractive entry point.” (As of press release, Citi is leading the way, while Bank of America's stock price is likely to close down during the year.)
Conclusion: A high-transaction, low-certainty earnings season
Combining the two clues, the picture in the three-quarter report is quite clear. The highlights on the revenue side focus on stock trading and equity capital markets. The average volume of investment bank expenses and net interest income can still record high single-digit year-on-year growth. Credit costs are moderate, and stock trading revenue will reach a record close to 19 billion US dollars.
However, the pressure was also concentrated and the direction was the same: fixed income income hit the lowest level in the year, the value of announced mergers and acquisitions fell by about 10% year on year, AOCI's floating losses lowered core Tier 1 capital, and the superposition of AI narratives suppressed valuations. Deutsche Bank downgraded the ratings of American Commercial Bank, PNC, and Regional Finance at the end of September because valuations tend to be fully compounded by concerns about high interest rates. This quarter's earnings report will provide the first answers to these judgments.
In terms of specific targets, Deutsche Bank maintains preferred J.P. Morgan Chase, Wells Fargo, and Huntington Bank: J.P. Morgan wins in capital thickness (formalized 13.6%, 210 basis points higher than regulation) and net interest income elasticity (+1.7% per 100 basis points), and the variables to focus on are cost guidelines; Wells Fargo wins interest spreads and expense discipline, and the company may disclose net interest spread guidelines excluding the trading sector for the first time; Huntington Bank won the expected margin and valuation discount, and its stock price was only for its new fiscal year 2027 Stock earnings target is 8.7 times the low end of the range, while the industry is consistent according to the 2027 market Expected transaction is 10x.
Deutsche Bank's summary is: The bank's capital is still abundant, but the uncertainty of the interest rate path is causing management to move the “multiple repurchases” matter away from the top of the capital allocation table.