OPENING: Big banks are about to report revenue that could approach or exceed records set earlier this year. Yet investors are already asking if the good times can last. The numbers are huge, but so are the risks lurking ahead.
The surge in investment banking revenue marks a sharp turnaround from the post-pandemic slump, when low interest rates and muted M&A activity weighed on earnings. Now, with geopolitical turmoil and a historic IPO, the sector is experiencing a renaissance that has lifted financial stocks above the broader market for two consecutive years.
Record Earnings on Tap
On Tuesday, JPMorgan Chase, Goldman Sachs, Wells Fargo, Citigroup, and Bank of America will announce their quarterly results. Morgan Stanley reports on Wednesday. KBW analyst Chris McGratty forecasts a 26% jump in investment banking revenue for the group compared to last year.
That boost comes from two big sources. First, the SpaceX initial public offering in June - the largest IPO ever - generated hundreds of millions in fees. Banks that led the deal, like Goldman Sachs and Morgan Stanley, collected not just underwriting fees but also "soft dollars" from hedge funds. Those are payments hedge funds make in exchange for getting a slice of hot IPO shares. Finance professor Jay Ritter explains: "The big money maker for investment banks in IPOs is not the bankers' fee, but the ability to allocate shares to hedge funds and some active mutual funds that pay soft dollars."
The convergence of a record IPO and war-induced market upheaval has created a rare double tailwind for investment banks, letting them harvest fees from underwriting and trading simultaneously. Such an alignment of events is uncommon, and banks are quickly capitalizing on both fronts.
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Second, the Iran war has shaken global markets, boosting trading activity. Banks are seeing higher revenue from both stocks and bonds.
KBW analyst Chris McGratty says, "Banks are doing a good job these days of capturing the upside of volatility, whereas in previous cycles, they've been caught offsides." The result? Trading revenue is projected to climb 14% from a year ago.
A Broader Recovery Takes Hold
It is not just IPOs and trading. There are indications that commercial lending is beginning to recover. After years of wariness, companies are spending again. Mike Mayo, analyst at Wells Fargo, says, "Demand is back as companies treat the uncertainty as the new normal and build that new factory, invest in plants and get on with business."
One example is a $16 billion data center being built in Michigan by Related Digital for Oracle and OpenAI. That kind of AI-fueled corporate spending is boosting loan demand. According to Mayo, regional banks like Fifth Third may gain from this trend since commercial loans make up a bigger portion of their portfolios.
Mayo additionally points out that financial shares have beaten the overall market for two consecutive years. "You saw the largest IPO in history, a pace of mergers that's on track to be a record year, and a broadening out of trading to include equity and fixed income across myriad geographies," he says. "There's not much more you can ask for."
What to Watch
Now the hard part: Can the good times keep going into 2027? Analysts are watching two risks. One risk is potential blowups in private credit, but that worry has lessened for many banks since no fresh "cockroaches" have emerged - a label JPMorgan CEO Jamie Dimon coined following the failure of subprime auto lender Tricolor Holdings. Another challenge is deposit competition, where certain institutions must offer elevated rates to draw and retain customer funds, potentially squeezing margins.
Chris McGratty sums it up: "We know the quarter's going to be strong, so I think the question that you ask yourself is around sustainability, right? Is it all sustainable?"
Banks are reporting huge earnings, but the future depends on whether the drivers hold up.
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