Wall Street's largest banks are expected to extend their equity trading momentum in the third quarter, but cooling capital markets activity is deepening performance divergence across the sector.

According to analyst estimates compiled by Bloomberg on October 9, the five largest U.S. banks are projected to report combined equity trading revenues approaching $19 billion for the third quarter. Goldman Sachs is expected to lead with $5.1 billion, followed by Morgan Stanley at $4.9 billion, JPMorgan Chase at $4.5 billion, and Bank of America at $2.6 billion. Goldman Sachs will be the first to report next Tuesday.

By contrast, fixed income trading is under pressure, with the five banks' combined revenues expected to fall to their lowest level this year, and the M&A market also showing signs of cooling. Meanwhile, concerns that AI-driven cash optimization tools could accelerate deposit outflows are weighing further on bank stocks.

Wells Fargo analyst Mike Mayo said that nearly every bank was a winner in the first half, but that dynamic may not persist, with performance gaps across banks expected to widen further this quarter.

Fixed income trading revenues expected to hit year-to-date low

While rising interest rates may boost banks' loan interest income, they also place pressure on trading operations. Analysts expect the five largest U.S. banks to report combined fixed income trading revenues exceeding $19 billion in the third quarter, down from more than $21 billion in the second quarter and potentially the lowest level this year.

Bank of America CEO Brian Moynihan warned in mid-September that the bank's fixed income trading revenues would decline in the third quarter, sending its shares sharply lower afterward. Goldman Sachs CEO David Solomon also said around the same time that fixed income trading was underperforming equities, which remained strong.

Bank of America analyst Ebrahim Poonawala expects U.S. capital markets activity in the second half of 2026 to be notably weaker than in the first half, and has raised questions about the sustainability of the current capital markets cycle.

Rising rates can also cause fluctuations in the book value of certain assets held by banks and affect earnings through accounting items such as accumulated other comprehensive income. Debt underwriting provides some support: a large volume of debt maturing over the next three years will need refinancing, generating financing demand. But Mayo cautioned that if rates continue to rise, bond demand could be dampened.

M&A activity cools as U.S. deal pipeline shows fatigue

Whether capital markets activity can be sustained is another key focus for third-quarter earnings. Bloomberg data shows that the total value of announced M&A deals fell about 10% year-over-year in the third quarter, with U.S. market activity showing signs of slowing.

The IPO market had a strong run this year, with SpaceX completing a record listing in June. Bloomberg previously reported that Anthropic plans to meet with potential investors next week to prepare for an IPO. But some listing plans have hit snags: Oura postponed its IPO in September, and Bamboo Insurance Services, backed by CVC Capital Partners, also delayed its listing plans.

JPMorgan Chase CEO Jamie Dimon said in an interview on Tuesday that the IPO and M&A pipeline in Europe is quite good, but the U.S. market may have seen some slowing in September.

Analysts expect JPMorgan Chase to report a 15% year-over-year increase in investment banking fees for the third quarter, with Goldman Sachs up about 8.1% and Morgan Stanley up about 1.9%. Jefferies, which reported earlier, showed divergent results: its investment banking and equity trading both posted record quarterly performances, but fixed income trading net revenues fell 26% year-over-year.

AI deposit outflow fears pressure bank stocks, analysts say selloff is overdone

Beyond slowing trading activity, potential shifts in money flows driven by artificial intelligence are also worrying investors. Markets fear that AI-powered cash optimization tools could help companies allocate capital more efficiently, thereby moving deposits away from traditional banks. The KBW Bank Index posted its worst third-quarter performance since the U.S. regional banking crisis in early 2023.

Morgan Stanley analyst Manan Gosalia noted that the recent decline in bank stocks reflects multiple concerns, including slowing capital markets revenue growth, rising funding costs, and potential deposit outflows triggered by AI cash optimization tools.

However, he believes the AI investment cycle will last for years, with benefits extending beyond large cloud computing companies to provide long-term support for capital markets businesses.

Both Gosalia and Mayo believe the market's concerns about AI potentially disrupting the banking industry are overdone. Although performance may diverge across banks in the third quarter, analysts believe that financing demand generated by AI investment is still likely to support long-term capital markets activity.