Dow Jones Forecast: What Do US Bank Earnings Tell Us About the Health of the U.S. Economy?

A Mixed Start to Bank Earnings Season

U.S. banks kicked off Q3 earnings season yesterday with a mixed performance.

JPMorgan, Goldman Sachs, Citigroup and Wells Fargo updated the market on the July-to-September period, but the message for investors is more complicated than the headline numbers suggest. This matters because big banks' earnings serve as an important economic bellwether, as they touch every sector of the economy, from household credit cards to large-scale corporate mergers.

These results provide a health check on Wall Street through trading, capital markets and corporate deal-making, but also on Main Street through consumer spending, loan demand and bad debts.

GS Beat, JPM Missed

Goldman Sachs posted stronger-than-expected earnings and revenue, with EPS beating forecasts by around $4 at $17.01. Equity trading did much of the heavy lifting, generating $6.44 billion in revenue, although this was below the $7.42 billion reported in Q2. Fixed-income trading was an area of weakness, with revenue down 1% year on year.

JPMorgan missed earnings and revenue estimates for the first time in nearly three years, as weaker fixed-income trading and slower commercial and investment banking activity weighed on results following a strong second quarter. Despite the miss, there were some positives. The bank raised its 2026 net interest income forecast to $106.2 billion, while equity markets revenue jumped 49% to a record $4.95 billion for the quarter.

Wells Fargo also delivered a mixed picture. Earnings beat expectations at $1.87 per share, but revenue disappointed at $21.87 billion, below the $22.31 billion forecast.

Consumers Are Holding Up, For Now

Still, the major lenders reported that consumers and businesses continued to spend and service their debts. Credit card spending rose 11% year on year at Citigroup, while JPMorgan and Wells Fargo saw continued growth in consumer loan and card balances.

Bad loans and charge-off rates have stabilised or improved compared with previous years. JPMorgan's provisions for credit losses fell 19% year on year to $2.74 billion. This suggests that borrowers are, for now, managing to cope with higher interest rates. However, the figures reflect the current position, and banks setting aside more money for potential card losses suggests they are not complacent about the outlook.

Even as the big banks reported higher profits than a year ago, they warned about the longer-term impact of higher interest rates and the effect higher prices could have on consumers if inflation is not brought under control.

Banks are preparing for a potentially tougher financial environment by setting aside reserves. Both Wells Fargo and Citigroup put more money aside to cover potential future card losses. JPMorgan CEO Jamie Dimon also cautioned about economic risks, pointing to higher energy costs, shifting Treasury yields and geopolitical uncertainty.

Higher Borrowing Costs Weigh on Deal-Making

Meanwhile, momentum in IPOs and mega-cap mergers cooled during the third quarter as financial conditions changed. Rising borrowing costs and market volatility have made deal-makers more hesitant. The mixed trading results also suggest that market volatility is creating opportunities in some areas while weighing on others, with investment banking activity still vulnerable to uncertainty and higher borrowing costs.

The overall message is that banks are not yet signalling a deterioration in the U.S. economy, but rising borrowing costs and signs of caution around future credit losses remain risks to watch.

CPI Could Influence the Fed's Next Move

Morgan Stanley and Bank of America report today, while attention will also turn to U.S. CPI data for further clues on the Fed's next moves.

Headline CPI is expected to rise 0.6% MoM, up from 0.4% in August. Core CPI, which excludes more volatile items such as food and energy, is expected to rise 0.2%, down from 0.3%.

A stronger-than-expected inflation reading could lift expectations for further Fed rate hikes. Markets are currently pricing in a 20% probability of a hike in October and an 85% probability of an increase before year-end.

Higher rates can support banks' net interest margins so could support the share price higher. However, longer term, higher rates also raise borrowing costs for households and businesses, increasing the risk of loan defaults. They can also weigh on deal-making and investment banking activity.

Dow Jones Technical Analysis

The Dow Jones trades within a descending channel dating back to 5 August. The price recently found support around 50,500, just above the 200 EMA, and has since recovered higher but failed to reclaim the 50 EMA, keeping the broader outlook bearish.

Buyers will need to retake the 50 EMA around 52,000 and break above the upper boundary of the falling channel at 52,300 to improve the technical picture. A sustained move above this resistance would bring 53,800, the September high, into focus.

Failure to reclaim the 50 EMA could see the index move lower again to retest 51,000. A break below 50,500, around the 200 EMA and October low, would weaken the support structure and could see sellers gain traction towards 50,200, near the lower boundary of the descending channel.