Big U.S. Banks' Trading Gains Amid Trump's Tariff Turmoil: A Short-Term Boost with Long-Term Risks

The recent earnings season for major U.S. banks has revealed a paradox: trading revenue surged on tariff-induced market volatility, while credit loss provisions climbed as economic uncertainty deepened. For investors, this raises a critical question: Can banks sustain the gains from short-term turbulence, or will looming credit risks and a slowing economy unravel profits?

The Volatility Bonanza

Tariff-related geopolitical tensions and regulatory shifts have created a “Goldilocks” environment for trading desks. Banks like JPMorgan Chase (JPM) and Goldman Sachs (GS) capitalized on heightened market volatility, with fixed-income and equity trading revenues hitting record highs. JPMorgan's FICC division, for instance, is projected to generate $5.2 billion in Q2 2025, while Goldman's equities trading unit booked $3.7 billion—a testament to the benefits of chaos.

Yet, this boom comes at a cost. While trading gains offset declines in investment banking fees—down 17% at Bank of America (BAC) and 0.4% at Goldman—the broader economy is showing strain. reveal that equities have been volatile, reflecting investor anxiety about the durability of these gains.

The Credit Risk Looming Overhead

Beneath the surface, credit metrics are deteriorating. All four banks increased provisions for loan losses, anticipating inflationary pressures and a potential slowdown. Citigroup (C) raised reserves for emerging markets and corporate lending, while JPMorgan's CEO, Jamie Dimon, warned of “uncertainty” around tariffs' impact on corporate borrowers.

The data is stark: shows a 15-20% year-over-year rise across the sector. These provisions are not mere technicalities; they signal a shift from optimism to caution in underwriting.

Regulatory Relief or a False Dawn?

A glimmer of hope lies in the proposed easing of the Supplementary Leverage Ratio (SLR), which could free up $70 billion in capital. This flexibility may allow banks to expand trading activities further, retaking market share from non-bank competitors like Citadel Securities. However, this is a double-edged sword: excess capital could fuel risk-taking in already overheated markets, or it could be deployed prudently to bolster liquidity buffers.

The Balancing Act: When Does Volatility Become a Liability?

The banks' performance hinges on two unresolved questions:
1. Will tariff-driven volatility persist? If trade disputes escalate beyond 2025, trading desks may continue to thrive. But if a truce emerges, the boom could evaporate.
2. Can credit quality hold? Even if provisions are a precaution, rising defaults in consumer and corporate lending—particularly in inflation-hit sectors—could erode profits.

Investment Strategy: Navigating the Tightrope

For investors, the path forward requires a nuanced approach:

Focus on Equity Trading Strengths
Goldman Sachs and Citigroup, which dominate equities and institutional client services, are better positioned to sustain gains. Their trading businesses are less reliant on fixed-income markets, which may suffer if interest rates stabilize.

Prioritize Liquidity and Diversification
Banks with robust capital cushions—JPMorgan and Citigroup, which have restructured operations to reduce risk—are safer bets. Avoid banks overly exposed to consumer lending (e.g., Bank of America's credit card portfolios) unless valuations reflect recession risks.

Beware Overvaluation
Despite Q2's trading gains, stock prices may already price in too much optimism. suggest that valuation multiples are stretched relative to historical norms. A slowdown in 2026 could trigger a reckoning.

Conclusion: A Fragile Equilibrium

The banks' Q2 results underscore a precarious equilibrium: trading gains are real, but they depend on conditions that threaten their core lending businesses. Investors must weigh the allure of volatility-driven profits against the gathering storm of credit risks. Those choosing to invest should favor banks with diversified revenue streams, strong liquidity, and minimal reliance on fragile sectors. The era of “tariff trading” may be profitable now, but its expiration date is fast approaching.

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