What can bank profits tell us about the economy?

With the government shutdown leading to a data blackout, the upcoming US bank earnings season will allow investors to gauge the health of the economy.

Major banks like JPMorgan Chase, Wells Fargo, Citigroup, Goldman Sachs and Bank of America begin reporting earnings next week. Analysts say that at least until September 30, banks were in strong shape and poised for further improvement in the final quarter of the year.

Borrowers, whether credit card holders or large corporations, showed few signs of stress. Loan activity was improving, and excited markets were pushing fees into the Wall Street operations of the big banks. President Donald Trump’s administration is working to ease banking regulatory restrictions, both on small, single-branch banks and giant banks.

“The group’s backdrop is as strong as we could hope for,” Scott Sievers, a banking analyst at Piper Sandler, wrote in a note to clients.

However, optimism could fade if the economy takes a turn – a scenario that is increasingly difficult to gauge since the lockdown means the official September jobs report and other economic data will not be released.

Investors don’t seem too concerned. The returns of the KBW Nasdaq Bank Index slightly exceed those of the S&P 500.

The industry faces “high expectations” when it begins reporting earnings next week, UBS analyst Erica Najarian wrote in a note to clients, with one key question being what banks can make after the recent stock rally.

Will bank CEOs stay positive?

If the economy fluctuates, banks will suffer as borrowers struggle to repay their loans.

However, bank CEOs have been mostly upbeat in recent weeks. They pointed to continued spending from high-income earners, a boom in the construction of data centers to support the economy and improve corporate morale, as the tariff picture shows.

“I’m optimistic that we’ll probably see an acceleration as we continue to head into 2026,” Goldman Sachs CEO David Solomon told Bloomberg TV this month, though he noted that the labor market is undoubtedly “a little bit weaker” today.

Banks’ loan portfolios did not show major cracks this year. Banks had to write off just 0.60% of their loans in the second quarter, up slightly from their pre-pandemic averages, according to the Federal Deposit Insurance Corp. And write-offs are still well below any recession-level numbers — in 2010, for example, that number was more than 2% per quarter.

Alistair Borthwick, Bank of America’s chief financial officer, said at a Barclays conference last month that the US consumer “remains very resilient” and the health of corporate credit remains “remarkable”.

“Profitability is good. Cash flow is good,” Borthwick said. “We can see that US companies are doing well.”

It’s an upbeat assessment shared by several other bank CEOs at the same conference, according to Barclays analyst Jason Goldberg. That’s one reason why recent bank earnings results “should continue to beat expectations,” he wrote in a research note.

He and other analysts expect a slight deterioration in banks’ portfolios in their upcoming issuances.

He pointed out that delinquencies on credit card loans showed continued improvement, after a period of deterioration two years ago when inflation and high interest rates led to some deterioration. He added that some of the pressures for loans for older office buildings associated with rising interest rates and shifts in remote work habits appear to be “well known” by now.

What could cause a reversal in optimism?

He wrote that a prolonged government shutdown could dampen the outlook.

Although banks tend to offer temporary relief to affected customers, furloughed government employees may cut back on spending, he wrote. Downtime at the Small Business Administration or Department of Housing and Urban Development may also delay loan activity.

Goldberg noted that a longer shutdown could also lead to temporary market volatility, which could slow down one of the current sources of catalysts for banks. Wall Street banks earn more fees by helping arrange recent IPOs and corporate mergers.

IPOs had their strongest quarter since the end of 2021, when low interest rates were fueling markets, according to consulting firm EY. Major corporate mergers are also on the rise.

“There’s real momentum in the deal-making environment. I think you’ll see that accelerate into 2026 for sure,” Goldman Sachs CEO Solomon said, though he also noted that he “wouldn’t be surprised” if stock markets took a turn in the next couple of years given their recent gains.

Are there more mergers between major banks?

Increasingly, these mergers now involve the banks themselves. Bank mergers rose to a 4-year high last quarter, according to S&P Global Market Intelligence, with 52 deals announced.

The industry has been consolidating for decades, as banks desire to cut costs and join forces to invest in new technologies. But that activity has slowed during the Biden administration, especially among major regional banks whose deals have faced more scrutiny from Washington, D.C

Now it appears that bigger banking deals are back. Last month, PNC Financial said it would buy Colorado-based regional FirstBank. An even bigger deal came this week: Ohio-based Fifth Third Bank Regional announced it was buying Dallas-based Comerica Bank.

“The emerging question is whether other major regional districts will feel compelled to respond with their own actions,” Piper Sandler’s Sievers wrote.

As bank stocks reach new highs, the worry among bank investors is not about the outlook for loan growth, the path of interest rates or potential problems in banks’ portfolios, Sievers wrote. Alternatively, some investors worry that a regional bank they own will pay too much to buy a rival bank.

He added that Fifth Third’s stock price has “held up well” since the announcement, suggesting investors are comfortable with deals “as long as they are fundamentally attractive.”