Surging Yields Threaten Wall Street’s Record-Breaking First Half as Earnings Season Begins

Key points

• JPMorgan, Goldman Sachs, and Citigroup will report earnings on Tuesday, followed by Bank of America and Morgan Stanley on Wednesday.
• The five largest banks have lost approximately $270 billion in market value from their summer highs due to rising long-term rates.
• Profits are expected to decline sequentially from the second quarter but remain higher year-over-year for most institutions, with Bank of America and Morgan Stanley potentially being exceptions.
• Investor sentiment has shifted sharply; only 35% of institutional investors expect bank stocks to outperform the broader market, down from 82% in December.
• The Federal Reserve raised its benchmark policy rate in September, increasing competition for deposits and pressuring lending margins.
• Some IPOs, including those by Oura and Nvidia-backed Firmus Grid, have been postponed or shelved due to higher capital hurdles.

Background

This development follows a record-breaking first half for Wall Street, where broker-dealer profits reached $45.9 billion, up 51% year-over-year, driven by AI investment and volatility. The sector is on track for a potential $90 billion annual profit record, shattering the previous high of $65.1 billion. However, the 10-year Treasury yield has climbed to 5.24%, raising concerns about the sustainability of this boom.

How outlets are covering it

Yahoo Finance emphasizes the structural risks posed by rising rates, noting that while trading results may soften, the speed of rate hikes could undermine the strong activity of 2026. It highlights the tension between higher lending income and increased funding costs. CNBC’s Jim Cramer offers a more bullish outlook, suggesting that recent weakness could set the stage for a rally if results exceed expectations. He specifically favors Goldman Sachs and Wells Fargo, citing strength in bond issuance and attractive valuations, while cautioning that JPMorgan is priced for near-perfect execution. Cramer also links the rate environment to broader market dynamics, noting that high yields are driven by demand for money from data center investments.

Why it matters

The outcome of this earnings season will determine whether the Wall Street boom is sustainable or if rising interest rates will trigger a correction. A slowdown in dealmaking and financing could impact the broader economy, while continued strength in AI-related financing could sustain the sector's record profits. The divergence in investor sentiment also highlights the uncertainty surrounding the future of the banking sector in a high-rate environment.

What to watch

Investors will closely watch the third-quarter earnings reports from major banks starting Tuesday, focusing on trading revenues, dealmaking activity, and funding costs. The CPI report on Wednesday and PPI/retail sales data on Thursday will provide additional clues on inflation and consumer spending, which could influence future rate decisions and bank performance.