(Yahoo! Finance) - Investors ended 2024 brimming with optimism about US banks. What happens during the start of earnings season this week will put that optimism to a new test in 2025.
The stocks of the biggest US lenders rallied following the election of Donald Trump on hopes that a new Republican administration would loosen some rules and apply more leniency in approving the sort of corporate mergers that produce big profits for Wall Street giants.
But those same stocks have started to flag as investors await fourth quarter and 2024 full year results this Wednesday and Thursday from the biggest names in the industry.
"Any sector, any stock that comes a long way in a short period of time, had better deliver the fundamentals to justify that type of move," Interactive Brokers chief strategist Steve Sosnick told Yahoo Finance.
JPMorgan Chase (JPM), the country’s largest bank, is expected to report Wednesday that it notched its second straight year of record profits and show that earnings in the fourth quarter jumped when compared to the same year-ago period.
Analysts also expect Bank of America (BAC), Wells Fargo (WFC), Citigroup (C), Goldman Sachs (GS), and Morgan Stanley (MS) to show profit increases for all of 2024 and the fourth quarter when compared to the year-ago period.
Not all of the results will be overwhelmingly positive, however. These big banks are expected to show that their profits in the fourth quarter actually fell when compared with the third quarter of 2024.
What most investors will be paying close attention to are any outlooks about the coming year, given the unpredictability of inflation, the US economy, the policies of the incoming administration, and the direction of interest rates.
A hot December jobs report, signs of persistent inflation, and trade policies expected from the new administration have many Wall Street strategists now confident that the Federal Reserve will hold off on further interest rate cuts for now — and that the door has been cracked open for the possibility of rate hikes in 2025.
There is a bull case to be made for how banks will fare this year following a full percentage point of rate cuts from the Fed in 2024. Rates are still high enough to ensure that big lenders can earn healthy lending margins, but they have come down far enough to give some bank borrowers a measure of relief.
Dealmaking is picking up too, with companies issuing debt at a record pace and initial public offerings ramping back up. And the Trump administration is expected to scrap a set of proposed capital rules that would have crimped future profits.
"I don't want to be like Pollyanna-ish, you know, there are certainly some wild cards out there, but the outlook overall is pretty good," Piper Sandler bank analyst Scott Siefers said.
What happens with rates this year, however, remains a big unknown. Even as the Fed has reduced its benchmark rate, the yields on longer-term rates have risen due to concerns about inflationary pressures.
"The interest rate environment is going to prove to be the biggest wild card," Siefers added.
Higher long-term rates are both good and bad for banks. They could produce higher unrealized losses on banks’ bond portfolios and pull down fixed-income trading revenue — two developments that may show up in fourth quarter results — while posing new risks for corporate customers.
But the higher rates may also mean banks can continue to charge more for their loans.
"We make a lot of money if that happens," PNC Financial Services Group (PNC) CEO Bill Demchak said at a Goldman Sachs conference last month.
The regional bank boss added that he ultimately feared such an outcome. "I think it [would] hurt the economy a lot," Demchak said.
So long as long-term, 10-year rates don't creep past 5% to 6%, bank analyst Mike Mayo predicts that a key revenue source known as net interest income will more significantly "inflect" across most US banks after the completion of the first quarter.
That revenue represents the difference between what banks charge on their loans and pay on their deposits.
"Choo choo, the train is taking off, but mind the gap so you don’t break a leg or anything," Mayo, who works for Wells Fargo, told Yahoo Finance.
By David Hollerith - Senior Reporter
