Wall Street's Earnings Test: Can Record Profits Survive a Shifting Rate Cycle?

Last year was a great one to be a Wall Street bank. The coming week will tell us just how great 2025 was. America's biggest banks will report fourth quarter and annual results in the coming days, with JPMorgan Chase (JPM), the nation's largest bank, kicking off proceedings with its results on Tuesday morning. The firm is expected to reveal another year of record revenue and one of its best years in profits. Bank of America (BAC), Citigroup (C), and Wells Fargo (WFC) are all expected to report results on Wednesday morning. Investment banking powers Goldman Sachs (GS) and Morgan Stanley (MS) will report Thursday morning. Each firm is expected to show that annual profits climbed from the year before.

That performance has been exceptional. The sector's stocks have significantly outperformed the broader market in 2025, pricing in a narrative of sustained excellence. The KBW Nasdaq Bank Index (^BKX) rose 29% last year, while the S&P 500 rose 17%. Analysts have already begun calling for a third consecutive year of outperformance in 2026. The industry's earnings outlook today is described as the best it has been post-Great Financial Crisis.

Yet this record-setting run now faces a critical juncture. The central question for 2026 earnings is sustainability. The backdrop is a shifting rate environment that is falling faster than market pricing. As of early December 2025, the Federal Reserve's target federal funds range remained 3.75%–4.00%, but expectations for easing have strengthened. The lag between policy direction and market pricing is shaping strategy as the year closes and will likely continue to define the credit landscape well into 2026. Banks benefited from higher net interest income over the past two years as loan yields rose faster than deposit costs. That dynamic is now shifting.

The stakes are high. With share prices hovering at record or multi-year highs and expectations running sky-high, merely delivering good news is rarely enough. Investors want to know if the surging investment banking and trading revenues that powered 2025 can offset any drag from traditional lending as rates fall, and if net interest income can remain robust after a year of easing. JPMorgan, the bellwether, is the first to answer.

The NII Drag and the Non-Interest Income Lifeline

The core financial tension for 2026 earnings is now clear. The primary risk is the drag on net interest income (NII) as the Fed's target rate declines. For two years, banks benefited from a favorable spread as loan yields rose faster than deposit costs. That dynamic is now shifting. As of early December, the Fed's target range was 3.75%–4.00%, but the lag between policy direction and market pricing is already influencing lender risk appetite. Deposit yields remain elevated due to competition and higher-rate CDs that haven't repriced, while borrowers see little relief. This creates a persistent margin pressure, forcing many institutions to emphasize liquidity and funding stability over aggressive balance-sheet expansion.

Against this backdrop, the offsetting strength in non-interest income has been spectacular. Analysts expect 2025 to see a record annual haul in trading fees across the sector. Wells Fargo is set for its own record in investment banking fees, highlighting the surge in dealmaking. This non-interest income lifeline powered the sector's outperformance in 2025, with the KBW Nasdaq Bank Index rising 29% while the S&P 500 gained 17%.

Yet the sustainability of this surge is the key variable for the forward narrative. Trading and investment banking revenues are inherently more cyclical, tied to volatility, market sentiment, and deal flow. While the current environment-marked by large volatility spikes and a climbing stock market-has been a tailwind, it may not last. The coming earnings reports will test whether these record fees can be maintained as the economic cycle matures and market conditions normalize. For banks to navigate the NII drag, they must demonstrate that this capital markets strength is not just a fleeting rally but a durable pillar of profitability.

The Macro and Balance Sheet Backdrop

The external environment for bank lending is one of cautious resilience, not robust expansion. Household debt grew at a moderate pace in the third quarter, with total balances rising $197 billion (1%) to $18.59 trillion. This growth was broad-based but not explosive, with mortgage balances leading the increase. The stability in delinquency rates, particularly for mortgages, reflects a housing market supported by ample equity and tight underwriting. Yet the picture is mixed. Student loan delinquencies remain elevated, and transitions into serious delinquency have increased across most debt types. This suggests pockets of stress are present, even as the overall consumer balance sheet holds firm.

This cautious consumer sets the tone for the broader economic impact of the Fed's easing. Rate cuts are not a guaranteed catalyst for a spending boom. As macroeconomic concerns around trade, inflation, and the labor market persist, they can inhibit spending by businesses and consumers alike. The labor market's resilience may be challenged by technological disruption, and long-term borrowing costs like mortgages are more tied to inflation expectations than to the Fed's short-term target. The result is a muted transmission of policy easing, which limits the potential for a sharp acceleration in loan growth.

The risk of pockets of stress remains a critical variable. If the Fed's easing cycle is driven more by political considerations than a benign economic outlook, the bank balance sheets that have built up capital buffers over the past two years could face a sterner test. The current environment of elevated but stabilizing delinquencies provides a margin of safety, but it is a thin one. The coming earnings season will scrutinize not just the headline profit numbers, but the quality of the loan book and the adequacy of loan loss provisions. For banks to maintain their record profits, they must navigate a macro backdrop where the benefits of lower rates are dampened by uncertainty, and where the consumer's debt load, while manageable, is not growing fast enough to offset the drag on net interest income.

Catalysts, Scenarios, and What to Watch

The coming week's earnings reports are a high-stakes narrative test. With stocks priced for excellence, the primary catalyst will be forward guidance on two fronts: the trajectory of net interest income and the durability of non-interest income. For banks, the story is no longer about surviving the rate cycle but navigating its next phase. The market wants to know if the record capital markets revenues that powered 2025 can be sustained as volatility normalizes, and if NII can hold firm after a year of easing. JPMorgan's bellwether status is heightened by its forward price-to-earnings ratio of 15.3 and premium profit margin, which demand a confident outlook to justify.

Management commentary on loan growth assumptions and credit quality metrics will be the critical lens for assessing that outlook. The macro backdrop is one of cautious resilience, not expansion. Household debt grew at a moderate pace of 1% last quarter, with mortgage balances leading. Yet, elevated student loan delinquencies and rising transitions into serious delinquency across most debt types signal pockets of stress. Banks that express confidence in their loan books and provisioning policies will likely see their valuations hold up. Those that sound more cautious may face questions about the consumer's true spending power in a softer macro environment.

The key risk is a 'stagflation-lite' scenario where persistent inflation pressures force the Fed to pause its easing cycle. This would leave banks in a squeezed middle: deposit costs remain sticky while loan yields fall, compressing NII further. At the same time, it would dampen the economic stimulus that could fuel loan growth. The sector's recent performance, driven by trading and investment banking, is a buffer against this. But as one analysis notes, investment banks with strong trading desks look better positioned than consumer-focused lenders in a flat yield curve environment. The earnings calls will reveal which banks have the balance sheet and business model to thrive in this uncertain middle ground.