Corporate dealmaking fuels big bank revenues—but for how long?

If this big bank earnings season had a theme song, we know which Katy Perry classic we’d pick. A week when they reported unexpectedly strong revenues—especially from investment banking and trading—but also forecast weak revenues and profits is one that we could only describe as “Hot N Cold.”

You’re yes… An uptick in corporate dealmaking fueled investment banking growth at the four largest US banks—JPMorgan Chase, Bank of America, Wells Fargo, and Citibank—as well as at Goldman Sachs and Morgan Stanley. The result was “one of [investment banking’s] best quarters” since the Fed began hiking rates in 2022, the Wall Street Journal reported. Their earnings releases over the last week either matched or beat the consensus forecasts for revenue and earnings per share, according to the Journal.

“It’s clear that we’re in the early stages of a reopening of the capital markets,” Goldman Sachs CEO David Solomon said in an earnings call last Monday. Goldman reported that growth in its investment banking and trading pushed its net income up 28% year over year, beating analyst expectations. Solomon said he expects more M&A activity will keep boosting the demand for debt underwriting at Goldman, which saw a 32% YoY jump in i-banking revenue.

… then you’re no: Solomon’s sunny outlook was beclouded the next day by Fed Chair Jerome Powell. The Fed had hoped inflation reports would show it could cut rates soon without overheating the economy, but instead inflation has continued to tick up. “[I]t’s likely to take longer than expected” for the central bank to feel comfortable with rate cuts, Powell said. He’s joined in that caution by San Francisco Fed President Mary Daly, who said last week that she feels “no urgency to adjust the policy rate.” (Former Treasury Secretary Larry Summers and JPMorganChase CEO Jamie Dimon have gone even gloomier, suggesting the potential for rate hikes.)

If interest rates stay up longer than economists have expected investment banking’s partial recovery from the pre-2022 rate hikes could suffer. The banks weren’t expecting a banner 2024 as it is, the Journal reported; in their earnings reports, “many said they don’t expect much revenue and profit growth this year.”