On October 11, JPMorgan Chase and Wells Fargo, two major Wall Street banks, announced their third-quarter financial reports. According to the data, JPMorgan Chase's third-quarter net profit fell 2% to $12.9 billion, and Wells Fargo's third-quarter net profit fell 11% to $5.1 billion. However, these figures were higher than analysts' previous forecasts, with JPMorgan Chase shares rising 4.4% and Wells Fargo rising 5.6% on the day.

The results of JPMorgan Chase and Wells Fargo are the latest indication that the Fed may have been able to tackle inflation without plunging the economy into a recession, a so-called soft landing.

However, with the Fed cutting interest rates, the market is full of questions about how JPMorgan will respond to the change. As with other big banks, JPMorgan's profit margins could be squeezed as yields on interest-generating assets, such as loans, fall. Last month, JPMorgan Chase lowered its forecast for net interest income and expenses in 2025.

Consumer resilience remains

Since 2022, the Federal Reserve has taken measures to raise interest rates rapidly in order to curb inflation. However, high interest rates have raised concerns about the health of the U.S. economy. To this end, the Fed cut its benchmark interest rate for the first time last month.

Jeremy, Chief Financial Officer of JPMorgan Chase "I think these earnings figures support the 'soft landing' view – or rather, the growing preference for a 'no-landing' scenario," Barnum said. ”

Barnum further explained that while consumers are spending less on travel and entertainment, these changes "fluctuate within normal ranges and do not indicate that consumers are actually stressed beyond the usual level".

Charlie, CEO of Wells Fargo Scharf also said, "We have been watching for any changes in consumer health, but we have not seen any significant changes so far. Credit and debit card spending remains buoyant, albeit at a slower pace, at a healthy level. ”

Michael, Chief Financial Officer of Wells Fargo Santomassimo added that the pressure on low-income groups caused by rising prices does not appear to have spread to the wider economy. However, he also cautioned that banks have not yet observed the economic effects of interest rate cuts, and corporate borrowers remain cautious. Because, after a two-year tightening cycle, banks' lending margins – that is, net interest income – are expected to come under pressure as US interest rates fall.

There are many views in the market that are starting to be bullish on bank stocks

As major banks have announced their financial reports, Landsberg Michael is the Chief Investment Officer of Bennett Private Wealth Management Landsberg is optimistic, saying: "We expect the earnings season to remain solid, especially for large banks, whose credit card defaults remain low, and that increased economic activity should drive bank earnings." ”

David of UBS Global Wealth Management Lefkowitz added: "As the Fed embarks on a rate cut cycle, the economy should benefit from lower interest rates on credit card debt and business loans. As a result, we expect Q3 results to continue the recent healthy trend. ”

Torsten of Apollo Global Management Slok noted that financials tend to be one of the best-performing sectors in rate-cutting cycles, which typically end in a "soft landing". Slok came to this conclusion by studying the total returns of each sector during the two cycles of interest rate cuts, July 1995 to January 1996 and September 1998 to November 1998, which did not overlap with the recession.

However, there is also the view that after a two-year tightening cycle, banks' lending margins could come under pressure as US interest rates fall. JPMorgan Chase & Co. President Daniel Pinto said last month that analysts' forecasts for next year's expenses and net interest income may be overly optimistic, noting that the current net interest income forecast is "unrealistic" given the current interest rate environment.

The U.S. banking sector is not out of the woods

In September, the Federal Reserve announced a massive 50 basis point rate cut, which is usually good news for the banking sector, especially when the cut is not a harbinger of a recession.

However, the process may not have been without its twists and turns: persistent inflation concerns could mean that the Fed will not cut interest rates as aggressively as expected. Janney Chris, Director of Research at Montgomery Scott "The market is volatile as inflation seems to be accelerating again, which is also confusing to me as there are concerns about whether the Fed will pause its rate cuts," Marinac said in an interview. ”

Still, the market expects all US banks to eventually benefit from the Fed's easing – although the exact timing and extent remain uncertain, depending on factors such as the interest rate environment and the sensitivity of bank assets and liabilities to interest rate movements. Theoretically, banks will benefit when their funding costs fall faster than their yields on earning assets, improving their net interest margins.

However, for some banks, their assets may reprice faster than deposits in the early stages of the easing cycle, leading to lower yields, which means that their profit margins may be affected in the coming quarters.

Richard, an analyst at Goldman Sachs Bank In an Oct. 1 report, Ramsden noted that large banks are expected to see their net interest income fall by an average of 4% in the third quarter due to slow loan growth and the delayed effect of deposit repricing. The report also mentions that the cost of deposits for large banks will continue to rise in the fourth quarter.

Last month, JPMorgan Chase & Co. President Daniel Pinto also warned investors that analysts may be overly optimistic about JPMorgan's 2025 net interest income forecast.