Why Are Bank Stocks Starting to Fall? Q2 Trading Surge Hard to Replicate, Investment Bank Revenue May Face Pressure After Fed Rate Hikes

TradingKey - On September 22 ET, the Nasdaq Composite Index hit a record high, while bank stocks generally came under pressure. Wells Fargo (WFC) fell 3.92%, UBS (UBS) dropped 3.66%, JPMorgan (JPM) declined 3.42%, Bank of America (BAC) slid 3.04%, and Citigroup (C) fell 1.91%.

This is not the first time bank stocks have pulled back collectively in recent days. After the Federal Reserve raised interest rates by 25 basis points on September 16, bank stocks were sold off, with the KBW Bank Index falling 2.9%, marking its largest decline since February.

Market concerns are primarily focused on two points: the high growth rate of second-quarter trading operations is difficult to replicate, while uncertainty regarding interest rate paths and financing activities may continue to weigh on investment banking revenue. Together, these two factors have prompted investors to lower their short-term earnings expectations for banks, but this does not mean all business lines are weakening simultaneously.

Trading Boom Hard to Replicate

In the second quarter, brisk trading in AI-related stocks, increased transactions in Asian semiconductor companies, and market hotspots such as the SpaceX IPO heightened interest and trading demand, collectively driving up equities trading revenue for banks. Combined equities trading revenue at four major institutions—JPMorgan Chase, Goldman Sachs, Citigroup, and Bank of America—surged 72% year-over-year to $19.3 billion. Given this high base, sustaining the same pace of growth going forward will require both market volatility and client trading demand to remain strong.

Morgan Stanley Co-President Daniel Simkowitz stated that market conditions in the second quarter were quite exceptional and that the third quarter will not replicate the second quarter's boom. JPMorgan Chase Co-President Doug Petno also noted that following the record quarter, the bank's markets revenue is expected to see a seasonal quarter-over-quarter decline.

Financing Activity Slows Down

Bank of America CEO Brian Moynihan noted that financing activity in Asia has cooled, with prime brokerage services for hedge funds, trading firms, and family offices contracting in the region. This indicates that some of the market activity supporting second-quarter trading revenue is weakening.

Uncertainty in the interest rate environment is also weighing on corporate financing decisions. Moynihan stated that companies will be more willing to issue debt only when they have greater certainty regarding future borrowing costs. For banks, lower corporate debt issuance could put pressure on investment banking underwriting fees and related capital markets revenue.

The key issue is not merely high interest rates, but the significant magnitude of rate swings. When companies struggle to gauge future borrowing costs, they may delay debt issuances, initial public offerings, or other capital market transactions. Consequently, banks face dual pressures from reduced trading activity and underperforming investment banking revenue.

Performance Diverges Across Business Segments

Although overall market expectations have weakened, individual banks hold differing views on the third quarter. JPMorgan Chase expects trading revenue to deliver high double-digit growth year-over-year, while Citigroup forecasts a mid-single-digit increase in markets revenue, both of which are better than Bank of America's expectation of roughly flat performance.

However, these growth forecasts remain significantly lower than the high growth levels seen in the second quarter. Goldman Sachs CEO David Solomon stated that the bank's equities business remains strong, but revenue from fixed income, currencies, and commodities will be slightly weaker in comparison.

This indicates that the decline in bank stocks reflects business segment divergence rather than a uniform deterioration across all operations. Equities trading may remain resilient, but fixed income, currencies, commodities, investment banking underwriting, and prime brokerage in certain regions could be impacted by a slowdown in financing activity and interest rate uncertainty.

Why Interest Rate Volatility Matters

The interest rate environment is another key to understanding the pressure on bank stocks in this round. Companies require relatively stable financing costs to make debt issuance decisions more easily; investors also adjust their assessments of bond yields and bank earnings prospects based on inflation expectations and policy paths.

When interest rate volatility intensifies, companies may delay financing plans, and dealmaking activity will also shift. Meanwhile, investors will reevaluate banks' future trading revenue, underwriting revenue, and net interest margin performance.

Therefore, the market is currently focused not just on the direction of policy rates, but on when the interest rate path will stabilize. Moynihan also noted that interest rates will eventually stabilize, which will help some dealmaking activity recover.

Will Bank Stocks Continue to Fall?

In the short term, the performance of bank stocks will depend on whether third-quarter earnings validate market concerns. Major Wall Street banks will roll out their third-quarter financial results in October, where trading revenue, investment banking underwriting fees, and the performance of various market segments could all act as catalysts for stock price volatility.

However, bank executives do not believe that long-term demand for market businesses has disappeared. Paterno noted that demand for prime brokerage and structured finance has risen significantly, marking a long-term structural trend that will persist for some time.

Solomon also pointed out that business growth will not follow a straight line. If the total market capitalization in the U.S. and globally continues to grow in the future, the scale of financing services provided to clients may also expand accordingly. From this perspective, the current decline in bank stocks appears more like a market correction to short-term high-growth expectations, and the subsequent trajectory will still depend on whether third-quarter earnings and interest rate volatility can ease simultaneously.