Big Banks are cashing in on stock trading

Good morning, investors. September CPI came in hot Wednesday, semiconductors and software stocks all sold off, and traders priced in more Fed rate hikes.

Just another day in markets.

Let’s turn to the banks.

Goldman Sachs’ stock-financing business nearly doubled in the third quarter.

Goldman earned $17.01 a share, crushing the $12.86 analyst consensus. Its equities desk brought in $6.44 billion in revenue, up 72% from a year ago.

Each bar shows equities trading revenue growth from a year earlier at the biggest banks. Stock desks outran everything else.

Prime brokerage led, with Goldman’s equities financing revenue hitting a record $3.37 billion, up 96%.

That’s the business of lending hedge funds money and securities to make their bets.

The rest of the Street told the same story:

Meanwhile, bond desks went backward.

JPMorgan’s fixed income markets fell 4% and Morgan Stanley’s dropped 7%.

Bank of America had it worst, with fixed income trading down 17%. The bank blamed the 85-basis-point jump in rates during the quarter.

The bars compare earnings per share with analyst estimates for the six biggest banks.

Goldman beat by the widest margin, about 32%, while JPMorgan and Bank of America fell short.

Notably, every big bank stock fell in the month before it reported Q3 results.

Bank of America, Goldman and Morgan Stanley each dropped 13% to 14%, while the S&P 500 rose about 2%.

On the lending side, Wells Fargo’s Charlie Scharf said “consumers are spending more, loan delinquencies are low,” and Citi’s Jane Fraser said “the consumer is still driving much of the growth.”

JPMorgan missed estimates and cut buybacks.

“[L]arge fiscal deficits, sticky inflation, elevated asset prices, rising interest rates and geopolitical conditions continue to shift under the surface,” Jamie Dimon said.

Banks now find themselves with two very different trading businesses. Higher rates hurt the bond desks, while Goldman credited higher prime and portfolio financing for its stock-desk gains.

As long as stocks keep climbing, the trade works.

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📊 Inflation ran hotter than expected in September. Consumer prices rose 0.6% for the month and 3.7% from a year earlier, while core CPI climbed 0.3% monthly and 2.6% annually against forecasts of 0.2% and 2.5%. (CNBC)

🏦 The Fed faces a politically fraught rate decision ahead of midterms. It’s the third straight election cycle in which the central bank’s decision lands days before voters head to the polls. (Yahoo Finance)

🚢 A container ship sank in the Strait of Hormuz after being hit by a projectile. The Singapore-registered GFS Pride has sunk, and all 21 crew members were safely evacuated, Singapore’s maritime authority said. (CNBC)

Julia Hermann is a global market strategist at New York Life Investment Management.

We sat down to discuss why she sees the US shifting into a market-led liquidity regime, what that means for the Fed put, and why she likes financials and shorter-duration bonds.

🗓 October 15, 2008: The Dow Jones Industrial Average fell 7.9% in a single day to 8,577.91 as recession fears deepened during the financial crisis. It was the index’s second-largest point drop on record at the time.

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