Wall Street’s record-breaking trading streak set to cool

Five of Wall Street's largest banks collectively saw their market value shrink by approximately $270 billion from their summer peaks, as rising interest rates raised concerns about their ability to sustain strong profits. While the S&P 500 remains up roughly 14% this year, the five major banks have experienced a decline in their stock prices, indicating growing caution among investors.

In the second half of the year, these banks had one of their most profitable six-month periods in at least a decade, fueled by strong trading, dealmaking, and financing activities. However, investors are worried that higher interest rates could weaken these activities, slowing business and reducing earnings in the coming quarters.

Major banks like JPMorgan Chase, Goldman Sachs, Citigroup, Bank of America, and Morgan Stanley are set to report their third-quarter results shortly, with investors closely scrutinizing their performance and comments for signs of the impact of higher interest rates. Analysts expect profits at these banks to decline, as revenue from trading, dealmaking, and financing is anticipated to retreat from the strong levels seen earlier.

However, most banks are still expected to report higher profits compared to the previous year. Brendan Coughlin, president of regional lender Citizens Financial Group, stated that the current business environment appears stable, but cautioned about potential future risks as financial conditions change. UBS analyst Erika Najarian emphasized that the sharp rise in long-term interest rates has been a significant reason for the recent underperformance of bank stocks.

Long-term rates influence borrowing costs, bond investments, funding expenses, and lending businesses. A Truist Securities survey revealed that only 35% of institutional investors expected bank stocks to outperform the broader market, down from 68% in July and 82% in December, reflecting a significant decline in investor confidence.

While rising interest rates may initially boost banks' interest on loans, they may also lead to increased costs for attracting customer deposits and securing funding from other sources. This could reduce the banks' profit margins. Moreover, the prices of existing bonds generally fall when market interest rates rise, which can put pressure on the value of banks' bond portfolios.

The rapid rise in rates adds to concerns about banks' financial positions, especially given the history of several high-profile financial failures shortly after abrupt movements in long-term bond yields. The weakening of trading activity, particularly in fixed-income markets, during September has raised concerns among investors about the continuation of this year's momentum into 2027.

Wall Street banks' advice on mergers and acquisitions (M&A) has also declined sharply, which could affect their important revenue source. Despite these challenges, Wall Street banks remain optimistic about financing opportunities in the expansion of artificial intelligence infrastructure, a sector that could benefit from their expertise.