U.S. bank stocks face a major test this week with Q2 earnings reports: Tariff fluctuations "support" trading income, and investment banking business recovery exceeds expectations

According to Zhitong Finance APP, boosted by market fluctuations caused by tariffs, the rebound in the capital market and strong stock trading business are expected to support the banking industry's profits in the second quarter. The earnings season will kick off on Tuesday, with JPMorgan Chase (JPM.US), Citigroup (C.US), Wells Fargo (WFC.US), State Street Bank (STT.US), and Bank of New York Mellon (BK.US) being the first to release their results.

Morgan Stanley analyst Betsy Graseck pointed out that the trading volume in North America's stock capital market fell by as much as 33% year-on-year on April 24, but had rebounded by 49% year-on-year by June 30. The volume of announced global mergers and acquisitions also rebounded from a low point, with a year-on-year decline of 22% on May 1, while the year-on-year increase by the end of the quarter reached 30%.

Graseck wrote in a report to clients: "Therefore, we expect investment banking revenue in the second quarter of 2025 to be better than expected, and management may mention that the business pipeline is expanding. In terms of trading business, stock market revenue is expected to grow by 10% year-on-year in the second quarter."

At JPMorgan Chase's investor day in May, its co-CEO of commercial and investment banking, Troy Rohrbaugh, stated that the year-on-year decline in investment banking revenue for the second quarter is expected to be in the mid-teens, while market business revenue is expected to increase in the mid-to-high single digits year-on-year.

JPMorgan Chase analyst Vivek Juneja expects the banking industry's second-quarter performance to exhibit the following characteristics: net interest income is expected to grow moderately by 2%-3.5% quarter-on-quarter; commercial and industrial loans are expected to grow moderately, but credit card loan growth is slowing; market-related income will drive business revenue growth; expense control is maintained; and credit quality remains stable.

Trust Securities analyst John McDonald stated: "The mid-quarter update shows that net interest income trends are in line with expectations, and improved loan growth lays the foundation for performance in the second half of the year. However, there are few highlights in deposit business, and the market is skeptical about seasonal factors and competitive pressures in the second quarter. In terms of fees, investment banking revenue may decline, while trading business is expected to improve due to favorable market volatility (with potential for exceeding expectations), and wealth management business has mixed results."

Last month, Citigroup's head of banking and executive vice president, Vishwanath Raghavan, stated in a meeting that the year-on-year increase in banking fees for the second quarter is expected to be in the single digits, while market business revenue is expected to increase in the mid-to-high single digits, "with a few weeks left for further observation."

McDonald pointed out that among global systemically important banks (GSIBs), investors have the lowest expectations for Wells Fargo's performance; among super-regional banks, the expectations for U.S. Bancorp (USB.US) are the lowest.

He mentioned that JPMorgan Chase and PNC Financial Services Group (PNC.US) may raise their performance guidance based on net interest income, "but PNC's increase may be offset by lower fee income expectations." Additionally, the market is concerned that Bank of America and Citigroup may raise their expense guidance, "however, investors tend to believe that neither bank will adjust their guidance."

Citigroup analyst Keith Horowitz stated that among large U.S. banks, credit concerns have eased, and stock price reactions are expected to be mainly linked to the outlook for net interest income, with Wells Fargo likely to deliver better-than-expected performance Morgan Stanley's Glasker believes that Goldman Sachs and JPMorgan Chase are the top picks ahead of earnings season. For Goldman Sachs, she expects growth in investment banking revenue, asset and wealth management revenue, and equity market revenue; for JPMorgan Chase, she anticipates an increase in fee income, a decrease in provisions, an increase in net interest income, a reduction in the number of shares outstanding, and a decline in expense spending.

Horowitz wrote in a report to clients: "Despite the market's focus on deregulation and the rebound in capital markets, we believe that regional banks have the greatest upside potential, expecting their tangible book value (TBV) to grow faster, and the premium recovery of securities and swap books will enhance return rates."

His preferred stocks in the banking sector are Ally Financial (ALLY.US), Citizens Financial (CFG.US), and Truist Financial (TFC.US), stating, "Although all key risk factors (interest rates, credit, and regulatory risks) are benign, we believe their long-term profit potential has not been fully recognized."

To provide context for the second-quarter performance, here are some banks' earnings guidance for 2025:

• JPMorgan Chase: Net interest income excluding market activities is expected to be about $90 billion in 2025; including market activities, it is about $94.5 billion. In an investor event, Chief Financial Officer Jeremy Barnum stated that net interest income excluding market activities could be about $1 billion higher.

• Wells Fargo: Net interest income in 2025 is expected to grow by 1%-3% year-on-year, amounting to $47.7 billion to $47.9 billion.

• Citigroup: Net interest income excluding market activities is expected to grow by 2%-3% in 2025 compared to 2024; total revenue for the year is projected to be $83.1 billion to $84.1 billion.

• Bank of America: Net interest income for the fourth quarter of 2025 (on a fully taxable equivalent basis) is expected to be $15.5 billion to $15.7 billion, compared to $14.6 billion in the first quarter