This Week in Earnings

Continuing last quarter’s earnings season trend, U.S. Banks are largely reporting strong results relative to Street expectations with most posting solid Q3 beats on the top- and bottom-line. Broadly speaking, results have been bolstered by strength in capital markets, investment banking, and wealth management. Executives remain largely optimistic for a more robust M&A and IPO environment on the horizon amid signs that sponsors may be readying to tap their more than $1T of dry powder.

As the Fed has kicked off its easing cycle with a 50 bps rate cut last month, questions around the expected path of interest rates and the impact on net interest income (NII) garnered outsized attention on earnings calls. While some noted near-term NII headwinds are likely to persist into next year, executives touted swift measures to reduce deposit pricing. With two additional 25 bps rate cuts expected this year (one in November and one in December), and more seen on the table for 2025, commentary also reflected the view that a more upwardly sloping yield curve should be more supportive in the year ahead, albeit with timing uncertain.

Continuing, overall loan growth remains muted, albeit with some positive comments around emerging demand trends and hopes for lower rates and post-election certainty to loosen pent-up demand. Views regarding the U.S. consumer reflect a continuation of trends seen in recent quarters, with spending more selective and lower-income groups under particular pressure. That said, executives point to normalization rather than a sharp drop-off, with consumers broadly on solid footing and supported by relatively low unemployment and steady wage growth.

Taken together, bank executives struck a mostly upbeat tone on the state of the U.S. economy and prospects for a soft landing supported by cooling inflation and the start of Fed rate cuts. At the same time, most remain guarded in their macroeconomic commentary, wary of heightened geopolitical turmoil and a contentious U.S. political landscape – what they describe as “tail risks” and a “variety of economic environments”.

Key Themes

• Macro and Outlook — Executives Describe U.S. Economy as “Strong” and “Resilient” and See Prospects for a Soft Landing Supported by Rate Cuts; However, Heightened Uncertainty Over Geopolitical Turmoil and the Upcoming U.S. Election Still Has Banks Preparing for “Tail Risks” and a “Variety of Economic Environments” 
• Interest Rates — After 50 bps Fed Rate Cut (and Further Rate Cuts Expected – Two More in 2024 By Most Estimates), Execs Highlight Dynamic Response to Shifting Yield Curve; Near-term Headwinds for Some Seen Abating in 2025 
• Consumer Health — Shift from Discretionary to Staples Continues: Lower Income Groups Remain Under Pressure, Though Consumers Broadly Seen on Solid Footing, Described as “Healthy but More Discerning” with Spending   
• Loan Growth — Remains Muted amid Macro Uncertainty and Still Elevated Borrowing Costs; Optimism Exists for Further Fed Rate Cuts and Post-Election Clarity to Loosen Pent-Up Demand in 2025 
• M&A and Capital Markets — Bullish Sentiment as Investment Banking Profits Rise, Driven by Opportunistic M&A and Increased Debt Capital Markets Activity; Optimism Remains for IPO and M&A Resurgence with Sponsors Sitting on $1T+ of Dry Powder 
• Artificial Intelligence — Execs Continue to Highlight Technology Investments and Opportunities to Drive Efficiency; While Some Focus on Successful AI Use Cases, Still Seen as Early Days, Especially Generative