Big Bank earnings: Why capital markets will be the key driver

Yahoo

08-07-2025

Bank stocks have surged since April, but uncertainty remains as earnings season approaches.
Ken Leon, CFRA Research director of equity research, joins Market Catalysts to explain why capital markets will be so crucial for Big Bank earnings in the second half of the year.
To watch more expert insights and analysis on the latest market action, check out more Market Catalysts here.
So, Ken, let's start with you and talk about that sort of macroeconomic backdrop for the big banks. What's your assessment of that and how it's going to feed through their earnings?
Well, it's great to be here and, um, really since the lows of April, uh, the bank stocks, particularly the US Global Banks have strongly outperformed the S&P 500. They're up over 2x that. Additionally, we still have uncertainty. So, um, it may be where you want to be more selective within the large banks. Uh, as noted, you know, with the downgrades today. Uh, we were a little bit early, uh, downgrading JP Morgan and Bank of America a couple weeks ago from buy to hold. We think really the delta for getting better fundamental performance and getting price performance, um, it's going to be the capital markets and that's something, uh, we should be talking about, uh, because the opportunities for the second half of this year, uh, look to be very positive.
All right, so let's talk about that because we have had sort of a freeze in deal making, right? Or at least a very tepid deal making environment. So what gives you the confidence that we're going to see that perk up and is that something that we're going to hear from these bank execs on conference calls?
Sure. So, so as a global research director, I'm looking at all the markets around the world. Uh, we began to see opening, uh, in May in Hong Kong, um, and now we're beginning to see, um, in IPOs, uh, large size deals, uh, in the US. Uh, we're additionally beginning to see mergers and acquisitions, uh, take place. It's coming, that comes from two areas. One, of course, is corporates, but the other is from the private equity firms, um, that need an exit on their funds where they own companies. Um, you they have about two trillion dollars of companies that have to be monetized. Uh, the last two years hasn't been a good exit ramp, uh, for M&A or IPO, uh, for the private equity firms, but it's happening. Uh, additionally, uh, rates aren't going higher, they're likely to be going lower. We see up to four rate cuts over the next 12 months. And, uh, we also have, uh, a much more constructive, uh, public policy and regulation, uh, not only from the Fed, uh, but from other agencies, that's going to suggest, uh, that it's a good time to invest. Uh, all this leads, I think, to strong performance, uh, and outlook, which we're going to hear from the banks next week.
So, if capital markets is the delta, uh, that's going to determine the second half of the year here, are there individual banks that you think are especially well-positioned in those capital markets and an investment banking?
Well, there are. So, I told you what we downgraded, but the ones that we still like, um, are Goldman Sachs, Morgan Stanley. Um, they also, it's a tough call. Your first question was about the economy. The general economy may be slowing in the second half of that year, but maybe not the capital markets. Additionally, rates could come down which impacts net interest income for the JP Morgans, Bank of Americas, that's 60% of their total revenue. More Goldman Sachs, Morgan Stanley, it's under 20%. So, it's more that as the non-interest income or transaction fees for these banks, uh, are going to be going higher, not lower in the second half of this year.