US bank stocks near correction as earnings loom, consumer outlook in focus

Shares of major US banks are hovering near correction territory as the sector prepares to kick off earnings season on Tuesday. Investors are watching executives’ outlooks for American consumers, with long-term borrowing costs remaining near multi-decade highs, Bloomberg News reported.

Wall Street’s biggest banks are expected to report nearly $19 billion in combined stock-trading revenue for the quarter, according to analyst estimates compiled by Bloomberg. Lending is expected to see a spike from a year earlier, while credit quality is likely to remain broadly stable.

Still, the benchmark KBW Bank Index has fallen more than 10% since mid-August, meeting the threshold for a technical correction. The decline has coincided with a surge in Treasury yields and the Federal Reserve’s first interest-rate increase in three years. The index also suffered its worst quarter since early 2023, when rising yields helped trigger a regional banking crisis.


Banks must balance what they pay depositors against the income they earn from loans, leaving them vulnerable to bond-market volatility. Further, they also facing pressure as interest rates on credit cards, auto loans and mortgages climb, according to Matt Miskin, a strategist at Manulife John Hancock Investments, Bloomberh reported.

Higher yields can boost revenue, but they can also reach “a tipping point where consumers just can’t pay these kinds of loans,” Miskin was quoted as saying.

Citigroup, Goldman Sachs, JPMorgan Chase and Wells Fargo are scheduled to report before Tuesday’s opening bell. Bank of America and Morgan Stanley will follow on Wednesday.

Jefferies Financial Group, which reported earlier, said its investment-banking and equity-trading businesses delivered record quarterly results, although other measures were mixed.

Options traders appeared bullish on JPMorgan ahead of its results. Demand for call options offering exposure to a 10% rise exceeded demand for protection against an equivalent decline, while outstanding calls outnumbered puts.

The US economy has remained resilient despite elevated borrowing costs and energy prices, which have intensified inflation concerns.

Bank investors are also assessing risks from artificial-intelligence agents and the November midterm elections, Bloomberg highlighted.

Republicans traditionally favour lighter financial-sector regulation, leading JPMorgan analysts to suggest that an unexpected sweep by the party could benefit lenders including Bank of America, Citigroup and Wells Fargo.

Wells Fargo analyst Mike Mayo remains optimistic about banking shares. He said last month that the elections could “put a dent in deregulation but should not derail it.” He also expects AI concerns to ease after earnings, arguing that customer trust gives banks an advantage in attracting deposits.

Morgan Stanley analyst Manan Gosalia described the recent selloff as “an attractive entry point” and recommended using the weakness to position for a stronger 2027. He cited AI-related investment and a resilient economy as supportive factors, adding that while higher rates increase banks’ funding costs, revenue should also rise.

CIBC Capital Markets strategist Christopher Harvey expects banking executives to sound more cautious about consumers and the economy than they did several months ago.

Even so, Harvey said the sector could see a relief rally because bank shares have historically rebounded after earnings when they underperformed beforehand. He recommended using any such bounce to reduce exposure because of persistent macroeconomic headwinds, favouring communication-services and utility stocks over financials.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)