Wall Street's largest banks are set to kick off the third-quarter earnings season next week, and the core tension is unmistakable: equity trading revenue is poised to hit a record high, but with fixed income fading, capital markets activity cooling, and AOCI (Accumulated Other Comprehensive Income) losses weighing on balance sheets, the divergence among bank stocks will be far more pronounced than in the first half of the year.

The bank earnings season begins on October 13, with Goldman Sachs (GS.US), JPMorgan Chase (JPM.US), and Wells Fargo (WFC.US) reporting before the opening bell. According to analyst data compiled, the largest Wall Street banks are expected to report combined equity trading revenue of nearly $19 billion for the third quarter, while the contraction in fixed income operations acts as a drag. This combination signals that the "everyone wins" dynamic of the first half is coming to an end. Wells Fargo analyst Mike Mayo put it bluntly: "For the first half, it was almost like everyone was winning, and now that may no longer be the case. The divergence between winners and losers this quarter could be wider."

Equity Trading Carries the Load as Fixed Income Hits a Yearly Low

The strength of equity trading is the most certain bright spot in the third-quarter reports, with Goldman Sachs expected to lead Wall Street's $19 billion in equity trading revenue. Goldman Sachs' third-quarter equity trading revenue is projected at $5.1 billion, Morgan Stanley (MS.US) at $4.9 billion, JPMorgan Chase (JPM.US) at $4.5 billion, and Bank of America (BAC.US) at $2.6 billion. Wells Fargo (WFC.US), meanwhile, saw both equity and fixed income trading revenue grow amid an upward revision to its net interest margin guidance during the quarter, roughly on par with Bank of America.

By contrast, the contraction in fixed income operations poses a drag. The five largest banks' fixed income businesses are expected to generate combined revenue of more than $19 billion in the third quarter, down from over $21 billion in the second quarter and potentially marking the lowest level of the year, partly due to an unusually high base from the prior year. Rising interest rates are a double-edged sword for trading desks: they benefit lending operations by having clients pay more interest, but they make life difficult for fixed income desks because falling bond prices erode gains from client market-making and inventory holdings. Bank of America's stock tumbled in mid-September after CEO Brian Moynihan warned that third-quarter fixed income trading revenue would decline. During the same period, Goldman Sachs CEO David Solomon also acknowledged weak fixed income performance while equity trading "remained strong."

Capital Markets: Jefferies Has Already Delivered the First Data Point

Jefferies (JEF.US) was the first to report in September, providing the market with an initial reference: its investment banking and equity trading businesses set records, but fixed income trading net revenue fell 26% year-over-year. These figures almost precisely foreshadow the script about to unfold for the major banks. Deutsche Bank estimates that investment banking fees for banks under its coverage will grow 7% year-over-year in the third quarter, slightly above Dealogic data, which showed the quarter was somewhat softer than expected. Structurally, equity capital markets led with 8% year-over-year growth, while M&A declined 7%, debt capital markets fell 6%, and syndicated loan revenue dropped 26%. In terms of volumes, globally announced M&A fell 1% year-over-year, completed M&A rose 12%, equity issuance grew 39% year-over-year, bond issuance rose 3%, and syndicated lending declined 18%. Deutsche Bank also holds a slight downward bias on weaker activity levels in late September. On individual stocks, the market currently expects JPMorgan's third-quarter investment banking fees to grow 15% year-over-year, Goldman Sachs 8.1%, and Morgan Stanley 1.9%. Bank of America analyst Ebrahim Poonawala offered a more direct assessment: capital markets activity in the second half of 2026 will be "significantly weaker" than the first half, raising questions about the sustainability of the current capital markets cycle.

Issuance Pipeline: IPO Is the Only Bright Spot

Debt underwriting has a buffer: there is a refinancing "wall" over the next three years, and some of that demand is already embedded in the pipeline. Mayo noted, "When it comes to debt underwriting, there's a refinancing wall over the next three years, and that's already built in to some extent." But he also warned that if rates continue to rise, it will hurt bond demand. The M&A pipeline has also shown signs of fatigue in recent weeks. In the three months through September, the value of announced M&A fell about 10% year-over-year. Initial public offerings remain the brightest window of the year — SpaceX completed a record-breaking listing in June, AI company Anthropic PBC is scheduled to meet with potential investors next week to prepare for an IPO, while Oura Inc. and CVC Capital Partners-backed Bamboo Insurance Services Inc. both postponed their listing plans in September. JPMorgan CEO Jamie Dimon suggested on Tuesday that there has been a slowdown compared with the first half, but more so in the US: "If you're talking about the IPO and M&A pipeline in Europe — pretty good. If you're talking about the US, September was probably a bit slower."

Net Interest Income: Divergence Is the Real Story of Q3

Deutsche Bank expects that rate movements will force some banks to raise and others to lower their net interest income guidance. Deutsche Bank projects that net interest income for banks under its coverage will grow 2% quarter-over-quarter on average and 8% year-over-year in the third quarter, but beneath the aggregate lies dramatic individual divergence. Behind this assessment is the surge in 30-year RMBS pass-through yields to about 102 basis points in the third quarter, roughly three times the 37 basis point increase in the first half. Such a dramatic rate shift makes quarterly forecasting of the core net interest income metric particularly difficult. Specifically, JPMorgan may be the most direct beneficiary — the bank habitually marks the forward curve to market in its net interest income guidance. Management's July guidance for fiscal 2026 was $105.5 billion (or $96.5 billion excluding the trading division), and Deutsche Bank believes rate factors alone could contribute more than $1 billion in annual gains. The company discloses that for every 100 basis point rise in rates, its net interest income increases 1.7%. Bank of America has a slight upward bias, with management currently guiding fiscal 2026 net interest income growth to the upper end of the 6% to 8% range. Deutsche Bank assumes 8.0% and believes the actual figure could be several hundred million dollars higher. Pressure is concentrated on several others. Truist (TFC.US) maintained its fiscal 2026 guidance unchanged, but that guidance does not include the $5.5 billion auto loan sale from late in the third quarter to early in the fourth quarter, which will be a drag in the fourth quarter. The company has also announced its exit from subprime auto, RV, and boat lending and is amortizing $1 billion of prime auto loans per quarter in both the third and fourth quarters, with actual loan runoff potentially exceeding the announced figures. U.S. Bancorp (USB.US) slightly raised its third-quarter net interest income guidance during the quarter, but Deutsche Bank cautions that the fourth quarter could be slightly weaker than expected due to front-loaded drag from rate hikes — the bank's medium- to long-term rate exposure is relatively neutral, but its liabilities reprice faster than its assets. Management has also abandoned its goal of reaching a 3% net interest margin by 2027. Morgan Stanley's wealth management segment net interest income outlook may be slightly lowered, but Deutsche Bank considers this not a significant driver of overall company earnings. Most other banks will likely maintain guidance unchanged: Fifth Third Bancorp (FITB.US) has already raised its fiscal 2026 outlook, Huntington Bancshares (HBAN.US) has lowered its fiscal 2026 and even fiscal 2027 guidance and provided target ranges under different rate scenarios, while KeyCorp (KEY.US), M&T Bank (MTB.US), and Regions Financial (RF.US) all reiterated their current-year guidance in September. Deutsche Bank's concerns about Regions Financial are slightly greater than for the other two, because its guidance assumes that "historically low deposit beta" will persist, while management expects deposit beta to rise to the high end of the 20% range in the fourth quarter.

This Cycle Is Completely Different from the Last One

Another key to understanding the third-quarter reports is that the operating environment of this rate-hiking cycle is almost the exact opposite of the 2022 cycle. Deutsche Bank lists four differences. First, the starting point for rate hikes is much higher. Before the first hike of this cycle, the federal funds target range was 3.50% to 3.75%, compared with just 0 to 25 basis points when the previous cycle began in March 2022. The magnitude and pace of this cycle's hikes are also expected to be more moderate — the current forward curve has priced in nearly four hikes, compared with only one to two as of May 22. Second, capital is less exposed to rate shocks, reflecting higher capital levels and returns, shorter securities portfolio durations, more interest rate swap hedges, and more securities classified as held-to-maturity rather than available-for-sale, thereby eliminating the mark-to-market nature of AOCI. Third, the deposit competition landscape is different. In 2022, banks faced excess deposits and weak loan growth, whereas today deposit market competition is intense but loan growth is strong. H8 data cited by Deutsche Bank shows average loans grew 1.2% quarter-over-quarter and 7.3% year-over-year as of September 23, while period-end deposits fell 0.9% from June 30. Fourth, deposit costs remain relatively low, with industry-wide deposit costs at about 64% of the effective federal funds rate in the second quarter of 2026, well below the long-term average of 80% to 85% since 1984. Credit markets also warrant attention. US high-yield bond spreads widened 37 basis points in the third quarter, with 32 basis points occurring in the final week of the quarter, while European high-yield spreads widened 56 basis points. Since September 30, high-yield spreads have widened another 5 to 10 basis points, while investment-grade spreads have remained broadly stable. Deutsche Bank notes that spread widening does not directly hit most banks' AOCI and capital, since banks have relatively small direct corporate bond exposure and loans are not marked to market, but it can have an impact through reduced lending volumes, drag on fixed income trading, and erosion of credit quality over time.

AOCI Shock: Pressure on the Capital Ledger

The other side of rising rates is the structural erosion of capital adequacy ratios, which is the most critical undercurrent of this third-quarter earnings season. Deutsche Bank estimates that the 10-year Treasury yield rose 82 basis points from June 30 in the third quarter (spot basis), while 30-year RMBS pass-through yields rose 102 basis points, the latter being a good proxy for bank securities portfolios. Changes in 30-year RMBS rates alone will deliver a 40 to 45 basis point capital hit to large banks. Under an alternative calculation, Deutsche Bank estimates that rate increases pressured its covered banks' book capital including AOCI adjustments by an average of about 51 basis points — unrealized losses on available-for-sale securities flow through the AOCI line to directly reduce Common Equity Tier 1 (CET1) capital. As Bloomberg has pointed out, such shocks create "paper losses" that make earnings reports bumpy. Deutsche Bank introduced a new methodology in its report: instead of only measuring available-for-sale securities gains and losses, it uses actual AOCI changes during the first half's rate rise multiplied by a factor of three to extrapolate third-quarter impacts. Under both methodologies, the industry average impact is broadly similar, but individual divergence is significant: investment banks (Goldman Sachs, Morgan Stanley) and money center banks (JPMorgan, Bank of America, Wells Fargo) saw notably reduced capital pressure, with Morgan Stanley and Wells Fargo showing the largest adjustments. Large regional banks diverged internally, with CFG, FITB, and USB seeing reduced capital pressure, while M&T Bank, Regions Financial, and Truist actually faced higher capital losses. Deutsche Bank also emphasized that banks under its coverage still have ample capital to meet regulatory and rating agency requirements and support loan growth — the real constraint is not "whether they have enough" but "whether they are willing." Taking JPMorgan as an example, its second-quarter CET1 ratio reached 14.2%, the highest among money center banks. After Deutsche Bank estimates a 60 basis point capital hit from rate increases, its pro forma capital level would be approximately 13.6%, still 210 basis points above current regulatory requirements. For Wells Fargo, Deutsche Bank expects its net interest margin excluding the trading division to exceed the second-quarter estimate of 2.95% in 2027 and beyond.

Buyback Retreat Becomes the Likely Scenario

Although absolute capital still meets regulatory requirements, rapidly rising rates, highly uncertain outlooks, and strong loan growth lead Deutsche Bank to conclude that most banks will slow or even pause buybacks. Deutsche Bank forecasts that banks under its coverage will repurchase a combined $31 billion in the third quarter (compared with $28 billion in the second quarter), but holds a downward bias on third and fourth quarter buybacks: only USB explicitly lowered its third-quarter buyback guidance, but Deutsche Bank believes FITB has effectively also paused buybacks, and other banks may similarly scale back. In terms of specific pacing, money center banks (JPMorgan, Bank of America, Wells Fargo) will likely "slow down but not stop," while of the nine large regional banks covered by Deutsche Bank, seven have simulated capital at or below 9.0% after including AOCI, making an outright buyback pause likely. Deutsche Bank expects buybacks to return to mid-single-digit growth only after rates stabilize, and if regulatory capital rules are finalized and Fed stress tests are eased, there is still upside for buybacks.

AI Shadow: Is the Panic Trade Overpriced?

Beyond earnings themselves, bank stocks in the third quarter also faced an additional layer of pressure — market concerns about artificial intelligence and fears that AI agents could drain deposits from the banking system. Morgan Stanley analyst Manan Gosalia said, "The stocks have pulled back notably due to concerns about slower capital markets revenue growth this quarter, concerns about higher funding costs, and concerns about AI-driven cash optimization tools." The third quarter was the worst for the KBW Bank Index since the first quarter of 2023, when the US regional banking crisis began to spread, and Morgan Stanley analyst Gosalia and Wells Fargo analyst Mike Mayo both believe this "panic trade" has been overpriced. But the sell side broadly agrees this "panic trade" has gone too far. Gosalia noted, "The entire AI investment cycle is a multi-year investment cycle, and it's not just limited to hyperscalers — it will continue to support capital markets for years to come." Both Mayo and Gosalia believe that with Wall Street about to deliver another strong quarter, cheap stock valuations could become a winning point for investors. Gosalia stated plainly: "We view this pullback as an attractive entry point." (As of publication, Citigroup led gains, while Bank of America shares may close the year lower.)

Conclusion: A High-Volume, Low-Certainty Earnings Season

Combining the two threads, the picture for the third-quarter reports is already quite clear. Revenue-side bright spots are concentrated in equity trading and equity capital markets, investment banking fees and net interest income can still post mid-to-high single-digit year-over-year growth on average, credit costs are mild, and equity trading revenue will reach a record near $19 billion. But pressures are equally concentrated and directionally consistent: fixed income revenue hitting a yearly low, announced M&A value down about 10% year-over-year, AOCI losses suppressing CET1 capital, compounded by AI narratives weighing on valuations. Deutsche Bank downgraded M&T Bank, PNC, and Regions Financial in late September due to stretched valuations and high-rate concerns, and this earnings season will provide the first answers to those judgments. On specific names, Deutsche Bank maintains its top picks of JPMorgan, Wells Fargo, and Huntington Bancshares: JPMorgan wins on capital thickness (pro forma 13.6%, 210 basis points above regulatory requirements) and net interest income elasticity (+1.7% per 100 basis points), with expense guidance the key variable to watch; Wells Fargo wins on margin and expense discipline, and the company may disclose net interest margin guidance excluding the trading division for the first time; Huntington Bancshares wins on expectation gap and valuation discount, with its stock trading at just 8.7 times the low end of its new fiscal 2027 earnings per share target range, while peers trade at 10 times on 2027 consensus estimates. Deutsche Bank's summary: bank capital remains ample, but uncertainty over the rate path is prompting management teams to move "more buybacks" away from the top of the capital allocation table.