US Banks' Q2 Earnings: Navigating Trade Tariff Turmoil and Fed Rate Cut Hopes

The second quarter of 2025 has set the stage for a critical test of U.S. banks' resilience against macroeconomic headwinds. As trade tariffs and Federal Reserve policy remain key uncertainties, JPMorgan Chase (JPM) and Goldman Sachs (GS) face diverging paths shaped by their exposure to trading revenues versus investment banking. With both stocks rallying ahead of earnings reports—JPM up 19.8% and GS up 22.7% in Q2—the question looms: Are these gains justified, or are investors overlooking fundamental risks?

The Divergence in Revenue Drivers

The earnings reports, due this week (JPM on July 14 and GS on July 16), will spotlight contrasting strategies. JPM's Q2 performance hinges on its trading revenue surge, projected to grow nearly 10% year-over-year to $31 billion, driven by market volatility tied to trade policy uncertainty and Fed rate speculation. In contrast, its investment banking segment faces a 10% decline to $7.5 billion, as M&A activity stalled early in the quarter amid tariff-related hesitancy.

Goldman Sachs, meanwhile, leans on its investment banking strength, with fees expected to rise 14.8% to $1.99 billion, buoyed by IPO resurgences and late-quarter M&A momentum. Its trading revenue, while volatile, benefits from client activity in equity and fixed-income markets. However, Goldman's valuation—trading at a forward P/E of 14.7X—remains elevated relative to peers like JPM (14.9X) and Bank of America (11.8X), raising questions about sustainability without further earnings growth.

Macro Risks: Tariffs, Rates, and Credit Quality

Both banks face systemic risks tied to trade policy and Fed decisions:
1. Trump's Trade Tariffs: The administration's ongoing renegotiation of trade deals creates uncertainty for corporate lending. JPM's $9.14 billion in non-performing loans (up 17% YoY) signals vulnerability to prolonged high rates and tariff-driven defaults.
2. Fed Rate Cuts: While a potential rate reduction could ease borrowing costs, it would also compress net interest margins (NIM). JPM's NII grew 3% to $23.4 billion, but its internal estimates suggest cautious assumptions about loan demand.
3. Credit Quality: Goldman's asset management fees, though stable, depend on AUM growth—a fragile metric in volatile markets.

Stress Tests and Capital Returns: A Lifeline or Overconfidence?

Both banks passed recent Fed stress tests, unlocking $50 billion in buybacks for JPM and a dividend hike to $4/share for Goldman. This signals confidence in balance sheets but risks overextending if earnings disappoint. The Q2 stress test results, while not part of the earnings reports, will underpin investor sentiment.

Valuation Risks: Are Bulls Overlooking the Elephant in the Room?

The rally in bank stocks assumes a “best-case” scenario: stable rates, tariff resolution, and a rebound in M&A. Yet risks abound:
- JPM's GuruFocus GF Value of $212.56 (vs. current $289.15) highlights overvaluation concerns.
- Goldman's Zacks Rank #3 (Hold) reflects skepticism about its premium multiple.

Investment Takeaways: Proceed with Caution

• JPM: Buy for its trading resilience and scale, but trim exposure at $293+. Monitor NII trends and NPL growth.
• GS: Hold for its M&A leadership but avoid chasing the stock above $700. Wait for clarity on tariff impacts and valuation multiples.
• Sector-Wide Risks: Regional banks (e.g., SPDR KRE ETF) lagged in Q2, underscoring systemic credit risks.

The earnings reports will test whether these banks can sustain momentum amid a slowing global economy. Investors must weigh near-term trading wins against long-term macro risks—no easy task in a world where tariffs and rates are the new normal.

Final Call: U.S. banks are navigating a tightrope. JPM's trading edge and Goldman's advisory prowess offer pockets of strength, but valuation premiums demand flawless execution. The bulls may win this quarter, but the real test begins after July 16.