Q3 Corporate Earnings Begins with High Hopes and Key Tests for Banks

Core Insights - The earnings season is commencing with major banks reporting, amidst a backdrop of record U.S. indices and a government shutdown [1] - Wall Street analysts have raised earnings estimates for the first time since late 2021, projecting an 8% year-over-year earnings growth for the S&P 500, marking the ninth consecutive quarter of expansion [2] Financial Sector Outlook - Financials are expected to lead this earnings season, with major banks like JPMorgan Chase, Citigroup, and Wells Fargo reporting [3] - M&A activity is showing signs of recovery, with Q3 seeing 111 M&A announcements and global M&A volumes reaching $1.26 trillion, a 40% year-over-year increase [3][4] - The IPO market is also reviving, with 150 IPO announcements in Q3, the best quarter since Q4 2021, indicating a healthier outlook for capital markets [3] Interest Income and Lending - Net Interest Income (NII) is under pressure, with modest growth expected as banks face competition for deposits [4] - Loan growth has been sluggish due to high borrowing costs, but banks are signaling optimism following better-than-expected loan growth in Q2 [5] Credit Quality and Trading - Credit quality remains stable, but any increase in delinquencies will be closely monitored, particularly in commercial real estate and among lower-to-middle income borrowers [6] - Trading is expected to be a strong performer due to market volatility driven by Fed policy changes and geopolitical uncertainty [6] Sector Performance Expectations - The technology sector is projected to outperform, with over 20% earnings growth driven by the AI sector, while consumer staples and discretionary sectors are expected to see declines in earnings [7][11] - AI corporate spending is contributing significantly to U.S. GDP growth, accounting for approximately 40% this year [10] Earnings Season Timeline - The peak of the Q3 earnings season is anticipated between October 27 and November 14, with November 7 expected to be the most active day [12] Market Sentiment - The current earnings season is characterized by a bifurcated market, with optimism in the tech sector contrasted by challenges in other sectors, setting a high bar for companies to meet [13]