Bank earnings: JPMorgan, Bank of America, Wells Fargo, Citigroup, Morgan Stanley, Goldman Sachs

Key Concepts

• Major Wall Street banks reported strong earnings in Q4 2025, but valuations are historically high, creating potential for disappointment.
• The outlook for 2025 is positive, but uncertainties surrounding the 2026 outlook, particularly regarding potential regulatory changes (like a credit card interest rate cap) and private equity risks, are growing.
• Capital markets are expected to remain strong, driven by equity underwriting and elevated global equity markets.
• Banks are increasingly involved in lending to private credit firms, presenting both revenue opportunities and potential risks.
• JPMorgan Chase’s Q4 2025 earnings were generally good, but the stock reaction was muted due to high expectations.
• The private equity sector faces significant risks due to over-leveraging and difficulty exiting investments, potentially leading to bankruptcies and investor redemptions.

Bank Earnings & Market Outlook

The six largest Wall Street banks collectively represent over 60% of the top 10 banks and recently reported strong stock rallies following their earnings releases. However, valuations are historically high, trading at over three times tangible book value in JPMorgan’s case, suggesting limited upside and increased risk. While 2025 is projected to be a positive year for the sector, with commercial loan growth expected in the mid-single digits aligning with anticipated economic growth of 2-3%, conversations during earnings calls increasingly focused on uncertainties impacting 2026. Global announced M&A deal value increased by over 40% in 2025, signaling strength in capital markets. A significant $2 trillion in private equity-owned companies requires monetization, potentially fueling a surge in IPOs, particularly in Q1 and Hong Kong.

JPMorgan Chase Performance & Apple Card Acquisition

JPMorgan Chase reported EPS ahead of expectations in Q4 2025, with positive core trends. Investment banking was down 2% year-over-year, a performance described as “not impressed” by CFO Jeremy Barnum, while equity trading experienced a 40% year-over-year increase driven by market gains. The acquisition of the Apple Card portfolio from Goldman Sachs resulted in a $2.2 billion charge, with revenue recognition delayed for two years, but is considered a strategically sound move to access Apple’s customer base. NII guidance for 2026 remained unchanged at $103 billion, a figure considered potentially conservative but insufficient to significantly impact the stock price given existing high expectations.

Regulatory Risks: Credit Card Rate Cap

A proposed 10% cap on credit card interest rates is a major concern for the banking sector. Banks, led by Jamie Dimon, would strongly oppose such legislation, initiating a significant lobbying effort. A 10% cap is considered “very, very negative” and could render a substantial portion of their card business unprofitable, leading to reduced credit issuance and tighter lending standards. JPMorgan’s CFO argued the cap wouldn’t benefit consumers, contradicting its stated intent. Capital One and Synchrony, with their high reliance on card revenue (Synchry with an average spread of 20%, peaking at 30%), would be particularly hard hit, as would Citygroup (approximately 20-25% of revenues and loans).

Private Equity & Non-Bank Lending Risks

Banks are increasingly lending to non-bank financial institutions, particularly private equity and private credit firms, becoming a growing revenue stream. However, the private equity sector is facing significant risks due to heavy debt-funding and difficulty exiting investments. An estimated 15-20% of US companies backed by private equity are potentially in default, masked by issuing more equity to investors – a “whistling past the graveyard” scenario. Banks are engaging in non-recourse lending to private equity managers, increasing their risk exposure. Business Development Companies (BDCs), reporting under GAAP, are showing a trend of portfolio companies opting for “pick pay in kind” arrangements, indicating financial strain. Distressed private equity firms are likely to face bankruptcies and investor redemptions, despite continued fundraising. The case of JD Power and Associates, taken private by PE and now unsalable, illustrates the challenges of exiting investments.

Broader Sector Trends & Considerations

Banks have been maximizing yields due to poor returns in other areas like single-family mortgages. The issues in private equity are largely independent of the broader economic cycle, stemming from over-leveraged acquisitions and inability to exit investments. Policy risk, particularly changes in regulatory policy like the proposed credit card rate cap, poses a significant threat to the banking sector. Wells Fargo is undergoing a turnaround, experiencing 7-8% loan growth, while Flagstar (formerly New York Community Bank) is showing positive performance. Synchry wrote off 5% of its total loans in the last quarter, considered normal for their business model.

Conclusion

The banking sector is currently benefiting from strong earnings and favorable market conditions, but faces growing uncertainties. While 2025 is expected to be a positive year, the outlook for 2026 is clouded by potential regulatory changes, particularly the proposed credit card interest rate cap, and significant risks within the private equity sector. Banks’ increasing involvement in lending to private credit firms presents both opportunities and potential vulnerabilities. High valuations suggest limited upside, and a cautious approach, positioning for under-promise and over-deliver in 2026, is advisable. The performance of the six largest banks will continue to be crucial for the overall health of the banking landscape.