Q1 Bank Earnings Preview: Tough Road Seen Ahead

The biggest U.S. banks begin reporting earnings Friday after a quarter that saw their shares and the entire global market rattled by changing economic policy. While analysts expect decent quarterly results despite last week's tariff sell-off in the markets that happened after the quarter ended, the path ahead appears rockier for both banks and their clients. Earnings calls could help investors understand how economic tremors from Washington, D.C., are shaping consumer and business trends.

Specifically, bank earnings come at an auspicious time for the industry and the entire economy following the trade war set off last week by President Trump's massive global tariffs. Bank stocks capsized on the news, not because tariffs directly affect banks, but because of the possible impact on banking clients and economic growth. Interest rates, which also can affect bank profitability, took a dive last week after the tariff news, and recession odds went up to 60%, according to JPMorgan Chase (JPM). Earnings calls from JPM and its competitors starting this week offer investors a chance to hear straight from executives and what they think of tariff policy and its potential impact.

Another question is how much banks may have to set aside to account for possible defaults if the economy really worsens and companies can't pay their loans. That was a constant worry during the pandemic, with banks taking large provisions for credit losses in the billions of dollars. If this starts ramping up again, it would likely narrow industry profit margins.

Heading into the year, bank stocks were on a roll as the economy grew steadily and unemployment remained near long-term lows. At the same time, hopes that the new U.S. administration would address taxes and regulations drove optimism about the banking industry. Lower taxes and less regulation typically favor business and consumer growth, which can help banks pad their bottom lines.

The regulatory and tax changes expected to spark capital markets activity following a tough regime under President Biden didn't arrive, keeping mergers and acquisitions (M&A) and initial public offerings (IPO) activity weak. Consumer and business sentiment dipped last quarter amid rising inflation and tariff worries, raising concerns that spending could hit a snag and cool the loan market. All this could work to the detriment of banks.

Bank earnings calls often set the tone for the entire reporting season, providing insight into the broader economy and what particular problems keep executives awake at night. Because banks by their very nature touch most parts of the corporate and consumer world, any takeaways on current policy and its impact might be watched not only by investors but in Washington, D.C., as well. If companies are struggling and consumers are pulling back on borrowing due to policy shifts, bank leaders will likely address exactly why and how.

"Tariffs are the big driver of uncertainty," said Michael Townsend, managing director, legislative and regulatory affairs at Schwab. "Companies can't plan if they aren't sure whether tariffs imposed today will be modified or delayed next week or next month. How can a business decide whether to upgrade equipment or hire a new employee if they don't know what the demand for their products will be in the months ahead?"

Bank executives, including JPM CEO Jamie Dimon, were sanguine about tariffs earlier this year. That tone changed in March as stocks struggled, with Dimon telling the Semafor news platform that "uncertainty is not a good thing" and that companies might be concerned.

This uncertainty helped send interest rates down sharply over the last two months, another headwind for banks because they can make more money when long-term rates are higher.

"Many big banks fell 15% to 20% from their highs, and interest rates were probably a factor," said Kevin Hincks, senior manager, trading and derivatives strategy at Schwab. "Uncertainty about policy is another, and if some of the data points toward a recession, that means slower economic activity. Banks make money off economic activity."

Part of the problem for banks is that policies like reducing corporate taxes and regulation, which can provide a jolt for businesses, require Congress and can take many months. Tariffs are easier to change and less helpful to banks. President Trump promised tariffs and delivered but hasn't had time to implement more market-friendly policies. The budget showdown in Washington, D.C., last month made it even clearer that Trump could face more struggles putting his economic agenda through.

Though tariffs and interest rates dominate headlines, investors shouldn't lose sight of first-quarter bank earnings themselves. This can be hard to quantify for the banking subsector because banks live in the wider financials sector that also includes credit card and insurance firms. Last quarter, financials led all sectors in earnings growth year over year, but that partly reflected easy comparisons due to significant charges related to FDIC special assessments and other items, FactSet noted.

For the first quarter, FactSet sees financials earnings per share up 2.6% from a year earlier, down from 6.9% growth projected back on December 31. Revenue is seen up 2.3%. Things could improve as 2025 continues, with FactSet projecting 7.8% earnings growth for the sector over the full year.

The biggest U.S. banks have a long history of surprising investors on the upside with earnings. That trend held true in the fourth quarter as most major banks easily exceeded analysts' average earnings expectations.

As always, watch each institution's general level of loan activity and the quality of their existing loans, though all this may be seen as less important because it happened before the trade war really began. Banks still have a good deal of outstanding loans on their books due for refinancing this year. Falling rates over the last few months could make it easier for customers and businesses to refinance loans. At the same time, credit spreads—which measure the expense of borrowing money—have widened over the last few weeks after staying relatively narrow for more than a year. If banks and other lenders sense a declining economy, they grow more reluctant to lend, and the spread between corporate bond yields and the U.S. 10-year Treasury note yield can climb, making it more expensive and less desirable to borrow.

In addition, smaller regional banks begin reporting next week and might provide investors insight into the small businesses and consumers that form much of their customer base, especially regarding trends they see from the higher tariffs. They can often deliver ground-level views of emerging trends like home buying and business loans demand. With the stock market down sharply so far this year, bank executives might be asked if they see the so-called "wealth effect" dipping and playing into investment decisions like buying cars or homes. Rising costs of materials due to tariffs could make cars and homes more expensive, also crimping banking activity in the coming months.

All this could play into banks' guidance, though net interest income (NII) is often a bigger determinant.

Besides tariffs' potential impact on the economic outlook, here are three things to watch as big banks report, starting with JPM, Wells Fargo (WFC), and Morgan Stanley (MS) on Friday, April 11, followed by Goldman Sachs (GS) on Monday, April 14, and Bank of America (BAC) and Citigroup (C) on Tuesday, April 15.

Though M&A was expected to roar back in 2025 thanks to the new administration, uncertainty around Washington policy appears to be holding back new deals. IPOs, another key driver for big banking revenue, have also been relatively sparse so far this year. Much of this reflects worries about a government shutdown that got resolved in mid-March but might have softened capital markets activity up until then.

Policy uncertainty aside, the Trump administration also made clear it plans to stay heavily involved in M&A regulation by following the tougher Biden-era 2023 merger review guidelines. In January, before Trump took office, GS said in its fourth-quarter earnings call that it was "optimistic on the outlook for 2025 and expects a further pickup in M&A and IPO activity."

The question is whether GS and other big banks change their tone now or if they think there's still a chance for a revival in these important categories if the market and economy can move past the current challenges. One startup advisor told Barron's last week he's never seen so many great companies waiting to go public, but macroeconomic uncertainty is keeping them from filing.

Longer-term bond yields are down double-digits since mid-February, so how will that affect net interest income (NII)? This key metric measures the money banks make on lending minus what they pay to customers. Since January when the 10-year U.S. Treasury note yield hit a near-term high of 4.8% and appeared to provide banks another tailwind in the form of better NII, yields have fallen sharply amid economic worries associated with the Trump administration's focus on tariffs and as economists take a red marker to their previous U.S. gross domestic product (GDP) estimates.

GS was among the most recent big banks to raise expectations for recession and reduce its estimate for GDP, neither of which could give financials sector investors much comfort. The 10-year yield fell below 4.2% in early April. "NII will come down if rates come down, and the 10-year yield has fallen from 4.8% to under 4% so far this year," Schwab's Hincks said. "But banks can make that up in other areas if the economy stays strong."

Fiscal policy has taken the baton from the Federal Reserve as the central player in the market game right now, according to Kevin Gordon, director, senior investment strategist at Schwab. Though analysts entered April expecting the Fed to be conservative on rate cuts this year, the tariff sell-off and recession fears last week changed that in a hurry. Recently, futures trading predicted four to five rate cuts in 2025.

However, if tariffs raise inflation, the Fed's hands might be tied even if economic activity lags. If weakness in the economy continues and rates fall further, it could hurt banks on the NII side. But lower rates have their advantages too, because they can light a spark for banks handling everything from mortgage loans to IPOs.

They also mean banks pay less interest on money stashed in their vaults. In this environment permeated by uncertainty over world trade, it's unclear how eager companies and consumers might be to take advantage if rates remain low. Banks tend to have a sense of how their business and consumer customers might react to lower borrowing costs and can also speak on their own expectations for Fed policy. Every sector is sensitive to rate policy, but big banks have extremely high exposure because it can directly affect their profit margin and customer demand for services in the capital markets.

For the major banks reporting Friday, analysts expect the following:

JPM: EPS of $4.60, up 3.6% from a year earlier, on revenue of $43.74 billion, up 4.3% year over year

WFC: EPS of $1.25, up 4.2% from a year earlier, on revenue of $20.8 billion, down 0.29% year over year

MS: EPS of $2.30, up 13.9% from a year ago, on revenue of $16.78 billion, up 10.85% year over year