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US Banks Third Quarter Earnings Snapshot: High Interest Rates Help, But Is a Recession Imminent?

Although banking shares have been down on the stock market throughout the third quarter, their gains are expected to be strong given high inflation and higher interest rates.

US bank’s third quarter earnings season

Like every quarter, US banks kick off their third quarter 2022 earnings season on October 13 with Goldman Sachs. He was followed on October 14 by JP Morgan Chase, Wells Fargo, Citigroup and Morgan Stanley. Bank of America publishes its results on October 17.

What to watch?

Since the beginning of the year, almost all stocks have taken on the chin, including banking stocks, which have fallen by around 26%! However, due to the surge in interest rates, the S&P 500 Banks Industry Group Index only dropped nearly 6% in the third quarter, a similar value to the index.S&P 500 Index. Rising inflation and rising interest rates helped banks stay on the sidelines in the third quarter. However, can the same be said of Q4?

Stock market trend of US banks in the third quarter

Source: Tradingview, StoneX

Inflation and interest rates

As we have seen, higher inflation often results in higher interest rates. Banks mainly earn from the difference between the interest they pay on net deposits and the amount they collect on loans. This, in turn, increases the value of profits for banks.

The third quarter was a quarter in which interest rates rose sharply. Therefore, rising inflation and rising interest rates should have helped the sector as a whole. This should have had a positive impact on the banks’ results.

Recession in sight?

There are fears that the Fed may raise rates too high and push the economy into recession. If so, it will not be good for stocks. Banks will undoubtedly see fewer loans and therefore will not receive as much interest. This would be bad news for bank revenues. An inverted yield curve has often served as an early indicator of an impending recession. The third quarter began with the yield curve reversed and continued in the same direction throughout the remainder of the quarter. Does this mean that a recession is coming? Watch out for headlines on recession issues.

Inverse rate chart (daily)

forex interest rates October 4, 2022
Source: Tradingview, Stone X

Stock market volatility

A rising tide lifts all boats is a phrase often heard on Wall Street, which means that if the general stock market rises, it is likely to lift all stocks.

However, the opposite can also be said. If the stock market goes down, all stock prices are likely to go down. Banking shares are no exception.

Watch the news to find out where banking companies think the market will go, and in particular where the banking sector might be heading.

Conclusion

Although banking shares have been down on the stock market throughout the third quarter, their gains are expected to be strong given high inflation and higher interest rates. Will it continue in the fourth quarter?

As long as the Fed keeps its foot on the accelerator, it will be fine for banking stocks. However, if forecasts show that banks are worried about a possible recession in the future, it could hurt stock market shares and affect their price in the fourth quarter. Follow the news!

By Joe Perry, CMT, FOREX.com »Official site

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Disclaimer: The information and opinions contained in this report are provided for general information purposes only and do not constitute an offer or solicitation to buy or sell any forex or CFD exchange contracts. Although the information contained herein has been obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, and assumes no responsibility for any direct, indirect or consequential damages that may arise from the fact that someone relies on such information.

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