JPMorgan to Kick Off US Bank Earnings as Fed Pivots

JPMorgan Chase, the largest bank in the United States, is set to release its third-quarter financial report before the opening of the U.S. stock market today, Friday. As the Federal Reserve initiates a rate-cutting cycle with a 50 basis point reduction, the American banking industry is far from being out of the woods.

According to the latest data from LSEG and StreetAccount, Wall Street's expectations for JPMorgan Chase's third-quarter performance are as follows:

Earnings per share: $4.01, lower than the $4.33 from the same period last year;

Revenue: $41.63 billion, higher than the $39.87 billion from the same period last year;

Net interest income: $22.73 billion, lower than the $22.9 billion from the same period last year;

Trading revenue: Fixed income revenue at $4.38 billion, and equity income at $2.41 billion.

In recent years, JPMorgan Chase has performed well in an interest rate hiking environment, and since the Federal Reserve began raising rates in 2022, its net income has reached record levels.

Now, as the Federal Reserve lowers rates, the market is full of questions about how JPMorgan Chase will respond to this change. Like other large banks, as the yield on interest-bearing assets such as loans decreases, JPMorgan Chase's profit margins may be squeezed. Last month, JPMorgan Chase lowered its expectations for net interest income and expenses for 2025.

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Analysts at Morgan Stanley downgraded their rating for JPMorgan Chase from "overweight" to "neutral" last month.

This year, JPMorgan Chase's stock has risen by 25%, outperforming the KBW Bank Index's 20% increase.The U.S. banking industry has not yet emerged from its predicament.

In September, the Federal Reserve significantly lowered interest rates by 50 basis points. Generally speaking, a decrease in interest rates is good news for banks, especially when the rate cut is not a harbinger of an economic recession.

However, this process may not be smooth sailing: ongoing concerns about inflation could mean that the Federal Reserve does not lower interest rates as much as expected. Chris Marinac, Director of Research at Janney Montgomery Scott, stated in a media interview:

"The market is volatile due to inflation seemingly accelerating again, causing worries that the Federal Reserve might pause rate cuts, which also puzzles me."

Nevertheless, the market still anticipates that all U.S. banks will ultimately benefit from the Federal Reserve's easing cycle—even though the timing and magnitude of this change are yet to be known, depending on factors such as the interest rate environment and the sensitivity of banks' assets and liabilities to rate declines.

Ideally, banks would benefit during a period when the decline in funding costs outpaces the yield on assets generating revenue, thereby increasing their net interest profit margins.

But for some banks, their assets may actually reprice downward faster than deposits in the early stages of an easing cycle, which means their profit margins could be hit in the next few quarters.

On October 1st, Goldman Sachs bank analyst Richard Ramsden stated in a report that, due to lackluster loan growth and lagging deposit repricing, net interest income for large banks is expected to decline by an average of 4% in the third quarter. The report also indicated that deposit costs for large banks will continue to rise in the fourth quarter.

Last month, Daniel Pinto, the president of JPMorgan Chase, warned investors that analysts' expectations for JPMorgan Chase's net interest income in 2025 are overly optimistic. He said:"Clearly, as interest rates decline, the pressure to reprice deposits will lessen, but as you know, our assets are very sensitive."

Pinto's remarks unsettled investors, leading to a significant drop in JPMorgan Chase's stock price. Analysts have revised down their net interest income forecast for JPMorgan Chase from $91.5 billion to $89 billion for the year 2025.

However, there are some offsetting factors to the negative impact of rate cuts on JPMorgan Chase. Analysts anticipate that lower interest rates will benefit the investment banking operations of large banks, as there tends to be increased transaction volume when interest rates decrease.