Recent second-quarter earnings reports from the largest US banks, including JPMorgan Chase, Bank of America, Morgan Stanley, and Goldman Sachs, have been received with considerable enthusiasm by analysts and media. Claims of record profit and evidence of a resilient banking sector have been widespread. However, a closer examination of these reports suggests a more nuanced reality.
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The growth in earnings for these banks has been largely fueled by their capital markets divisions rather than their core banking operations. For instance, JPMorgan's revenue increased by 27% year-over-year, but much of this growth stemmed from significant one-off gains. When these exceptional items are excluded, the revenue growth slows to approximately 15%. Specifically, markets revenue surged by 35%, with equities revenue skyrocketing by 86%, while net interest income, which reflects the bank's traditional lending activities, rose only 4%.
Bank of America similarly reported a 15% increase in total revenue, driven by a 33% rise in sales and trading revenue, which included a remarkable 70% growth in equities. Net interest income increased by 9%. Morgan Stanley's report echoed these trends, showing a 27% rise in net revenue with Institutional Securities revenue jumping from $7.6 billion to $11.0 billion, significantly boosted by a 69% increase in equities and a 58% gain in investment banking. Wealth Management revenue, while still strong, grew at a more modest rate of 14%.
Goldman Sachs exemplifies this trend, with a 53% year-over-year increase in Global Banking & Markets revenue, driven by a 72% rise in equities and a 55% increase in investment banking fees.
This pattern indicates that the impressive earnings reported by these large banks are significantly reliant on trading and investment banking activities, while growth in their more stable revenue streams is lagging. This is particularly noteworthy given the current favorable economic climate and the effects of deregulation supporting these banks.
Furthermore, two recent Federal Reserve studies provide critical insights. The first study found that the post-Global Financial Crisis (GFC) reforms have not effectively reduced solvency risks for larger banks, which have instead become more dependent on uninsured deposits, increasing their funding risk. The second study reviewed failed banks from 1997 to 2025, revealing that large banks today have weaker economic capital compared to their status in 2007, indicating they are actually more susceptible to failures now than before the GFC.
In conclusion, while recent earnings from major US banks reflect a period of notable growth, much of this success is attributable to capital markets instead of sustainable banking practices. This situation raises concerns regarding the banks' resilience and the robustness of their earnings should the current favorable conditions begin to wane.