Every three months, the biggest American banks open their books and tell the world how the previous quarter went. Their results traditionally kick off the wider US earnings season, and because banks sit at the centre of the economy, traders often read them as a health check on far more than just the financial sector.
Why banks tend to go first
Earnings season is the period after each quarter ends when listed companies report their results. In the US, the largest banks usually report first, typically around the middle of the month after a quarter closes. For the July to September quarter, that means mid-October.
Their early slot gives them an outsized influence on the mood. Investors who have spent weeks guessing about the economy suddenly get real figures from institutions that lend to households and businesses across the country.
What is inside a bank’s results
Bank earnings can look complicated, but a few areas tend to matter most.
Net interest income. This is the difference between what a bank earns on loans and what it pays on deposits. It is heavily influenced by interest rates, so it is often the first figure people look at.
Credit quality. Banks set aside money to cover loans that might not be repaid. Rising provisions can suggest the bank expects more borrowers to struggle, which is read as a signal about the wider economy.
Investment banking and trading. Fees from deals and income from trading desks can swing a lot from quarter to quarter, depending on how active markets have been.
Guidance. What management says about the coming months can matter as much as the past quarter’s figures. Comments on loan demand, consumer health and the rate outlook are closely watched.
Why the rate backdrop matters
Interest rates shape bank profits in several ways. Higher rates can widen the margin between what banks earn and what they pay, but they can also cool loan demand and increase the risk of borrowers falling behind. The shape of the yield curve, meaning the difference between short and long-term rates, also plays a role.
With the US 10-year Treasury yield at its highest level since 2002, traders are likely to listen carefully to what bank executives say about borrowing demand and credit quality this time round.
How results can affect the wider market
Bank results often move more than bank shares. Because banks see so much of the economy, comments about consumers or businesses can influence sentiment across sectors.
There is also a breadth angle. Recent US index records have been led by a narrow group of large technology companies. Some traders look to sectors such as banks to see whether the rally can broaden out. Our explainer on Nasdaq leadership versus S&P breadth explains why that matters.
Expectations versus reality
A key lesson of earnings season is that share prices react to results compared with expectations, not to results in isolation. A bank can report a strong profit and still see its shares fall if the market had hoped for more, or if the outlook disappoints. Equally, a weak quarter can be greeted with relief if it was better than feared.
That is why the reaction can sometimes look confusing. The headline figure is only part of the picture, and the detail in the guidance often drives the move.
Practical points for traders
Results are usually released before the US market opens, which is typically around midday in the UK. Price moves in the shares concerned can be large, and spreads can widen around the release. Conference calls with analysts follow, and comments made there can move prices again.
If you trade around these events, it is sensible to know the reporting dates in advance, keep position sizes modest and expect higher volatility than usual. Our guide to volatility in trading covers why that matters for risk.
If you would like to build a more structured approach to trading busy event periods, our free trader assessment can help you understand where your preparation stands and what to improve.
