Oct 13 (Reuters) – Wall Street’s investment banking and trading stalwarts posted uneven third quarter earnings as both equity and bond markets were rocked by the ongoing Iran war, rising inflation and jitters about the massive spending in the AI buildout.
The results from JPMorgan, Citigroup, Goldman Sachs and Wells Fargo suggest a dealmaking and trading boom that powered record first-half earnings may be slowing as a grinding bond market rout and equities volatility weighed on activity, particularly in late September, executives said.
Still, dealmaking for the third quarter was solid overall with a strong pipeline, while consumers, commercial borrowers and the broader economy remain in good shape, executives said.
“The economy continues to be very, very resilient despite some of the headwinds,” Goldman CEO David Solomon said on an analyst call. “We have an extraordinary tech supercycle. I think we have a regulatory environment that is really encouraging strategic activity … I think it’s a pretty good environment.”
A prolonged bond market selloff, which has driven yields around the world to multi-decade highs and put further pressure on stock market valuations, has interrupted dealmaking. The IPO market has lost steam in recent weeks, threatening what could have been a banner year for that business.
JPMorgan in particular said market volatility and the uncertain economic outlook dampened dealmaking and reduced bond-market trading in recent months, although its chief financial officer Jeremy Barnum told reporters the deals pipeline remained “very strong.”
During market turmoil, the gap between buyers and sellers can widen temporarily, but for the most part deals had been delayed rather than canceled, he continued. Analysts have likewise said the IPO market has been selective, not shut, and delayed offerings could still launch if conditions stabilize during the fourth quarter, a sentiment Solomon echoed.
“You might choose to wait, but the IPO market is still in pretty good shape,” Solomon said.
Citigroup CFO Gonzalo Luchetti said the bank saw softer investment banking activity in the third quarter, while Wells Fargo CFO Mike Santomassimo also pointed to a September slowdown, noting on a call with reporters that the big jump in the benchmark 10-year yield has had an effect.
“There is no doubt that high interest rates and the threat of continued Fed hikes is weighing on trading and IB activity in a measurably negative vector,” said Brian Mulberry, chief market strategist at Zacks Investment Management.
Despite rising prices and borrowing costs, consumers and corporate borrowers remain resilient, with little deterioration in credit quality, JPMorgan and Wells Fargo executives said.
“We’re just not seeing anything that would imply that there’s stress,” said Santomassimo.
EQUITY STRENGTH PERSISTS
Banks also experienced strong trading in equities, as clients rejigged their portfolios on the back of rates uncertainty and surging energy prices. JPMorgan said revenue at its markets division climbed 15% in the third quarter from the prior year, with equity markets revenue surging 49%.
Goldman beat third-quarter profit estimates, as volatile markets tied to the Middle East conflict lifted its equities revenue, even as its fixed income, currency and commodities business revenue dropped 1% from the year-earlier period.
Shares were mixed after results, with Wells Fargo and Citigroup lower while JPMorgan and Goldman rose.
“Our main concern with this and with other bulge bracket firms remains how much of the ‘beats’ seem concentrated in the equities trading business and how sustainable they will prove,” said Chris Kotowski, analyst at Oppenheimer & Co, in a note.
(Reporting by Manya Saini, Utkarsh Shetti, Pritam Biswas, Prakhar Srivastava, Tatiana Bautzer, Nupur Anand; Saeed Azhar and Nivedita Balu; Editing by Michelle Price, Megan Davies, David Gaffen and Nick Zieminski)
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