Big Banks Ride the AI Boom

Key takeaways

U.S. banks reported higher profits in the third quarter, with revenues up 9% to $115 billion, but face uncertain future impacts from rising interest rates and bond market volatility.
The recent Federal Reserve interest rate hike has not yet significantly affected banks’ profits, but it carries risks of slowing economic growth and raising unemployment over time.
Bond market turmoil, especially in September, has increased volatility, making companies hesitant to engage in mergers, IPOs, and trading activity, which are profitable for banks.
Executives remain cautiously optimistic about current market conditions, noting steady activity despite turbulence, but they are concerned about a potential prolonged slowdown in deal-making.
Slowing trading and investment banking revenues at JP Morgan caused its profits to fall short of expectations, despite strong consumer banking results.
Goldman Sachs' robust revenue, driven in part by capital needs from AI technology companies, signals ongoing strength in investment banking and AI-related investments.
Upcoming AI IPOs like Anthropic and OpenAI are seen as critical indicators of the continued flow of capital into innovative sectors, which supports economic growth.
The overall outlook remains mixed, with strong current earnings but potential risks looming from market volatility, geopolitical tensions, and changing investor sentiment.

Summary

Introduction to the Earnings Season and Banking Profits

The episode opens with an overview of the current earnings season, highlighting the strong profits reported by major U.S. banks like JP Morgan Chase, Goldman Sachs, Citigroup, and Wells Fargo. These banks have experienced increased revenue and profits compared to the previous year, with total revenue rising 9% to $115 billion. The host, Pierre Bienaimé, introduces WSJ banking and payments reporter Ben Glickman to discuss the implications of these results and the potential threats ahead.

Impact of Federal Reserve Interest Rate Hikes and Bond Market Volatility

Ben Glickman explains that although the recent interest rate hike by the Federal Reserve has not yet significantly impacted banks' bottom lines—mainly because rising rates tend to increase lending profits—the broader economic effects could still pose risks. Higher rates typically slow economic activity and raise unemployment, potentially harming bank profits over time. Additionally, turbulence in the bond markets, especially in September, has caused concern, as the volatility has slowed decision-making in the corporate sector, impacting activities like mergers, IPOs, and trading. Despite the turmoil, stock markets remain relatively robust, but a worsening outlook on deal-making could undermine confidence.

Market Conditions for IPOs and Deal-Making Amid Volatility

Glickman discusses recent delays and pullbacks in IPOs, such as Oro and firmness, amid volatile bond markets and economic uncertainty. While current conditions are still active, there’s concern among executives that continued delays could tip into outright cancellations, which would negatively affect capital flows to sectors like AI infrastructure. The upcoming IPOs for AI companies like Anthropic and OpenAI are seen as critical, as their success could signal strong capital support for technological advancements. A slowdown in IPO activity signals caution among investors and could have broader implications for economic growth.

Detailed Analysis of Bank Earnings: JP Morgan and Goldman Sachs

Glickman dives into the earnings reports of two leading banks, JP Morgan and Goldman Sachs. JP Morgan’s profits were $15.31 billion, with strong performance in its consumer banking segment, but its overall profit fell short of expectations due to slower trading and investment banking revenues. Goldman Sachs reported a profit of $5.29 billion, marking its second-best quarter ever in revenue, driven partly by capital needs from major tech firms investing in AI. Both banks’ results indicate resilience, but slower growth in certain segments points to cautious optimism amid ongoing market turbulence.

Conclusion and Forward Outlook

The episode concludes with reflections on the mixed signals from the banking sector: strong profits amid economic headwinds, cautious outlooks on deal activity, and ongoing uncertainties due to bond market turmoil and geopolitical tensions. The discussion emphasizes the importance for investors and companies to monitor these trends, especially given the potential for shifts in market confidence and economic momentum in the coming months.

Show notes

Bonus Episode for Oct. 15. Big U.S. banks opened earnings season with growing profits—and warnings that rising interest rates could stop the party. Still, bankers said higher rates have yet to dent consumer or business appetite to borrow and spend. JPMorgan Chase, Goldman Sachs, Citigroup and Wells Fargo each reported higher third-quarter profit and revenue from a year earlier. WSJ banking and payments reporter Ben Glickman says that’s in part because of the near-endless need for financing related to the artificial-intelligence industry. Revenue across all four increased 9% to $115 billion.

Pierre Bienaimé hosts this special bonus episode of What's News in Earnings, where we dig into companies’ earnings reports and analyst calls to find out what’s going on under the hood of the American economy.

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