Thanks to the Federal Reserve's interest rate cuts, a surge in trading activities around the U.S. elections, and a rebound in investment banking, the six major banks on Wall Street have just reported record earnings. For Wall Street, this is a welcome return after a period of calm. The fourth-quarter performance of major U.S. banks, including JP Morgan (JPM.US), Bank of America (BAC.US), Wells Fargo (WFC.US), Morgan Stanley (MS.US), Citigroup (C.US), and Goldman Sachs (GS.US), easily exceeded expectations.
Looking ahead to 2025, with Trump set to return to the White House for a second term on January 20, he has promised to reduce federal regulations on large companies, especially financial giants. Looser regulations may stimulate increased trading, thereby boosting banks' fee income. Additionally, Trump has pledged further tax cuts, increased oil production, and strict immigration policies, all of which indicate that U.S. economic growth and inflation are likely to strengthen, which is also seen as a positive factor for large bank stocks.
<h2>Investment Banking Business Grows at Full Speed</h2>
The massive profit machine that keeps Wall Street running is accelerating.
Previously, due to regulatory uncertainties and rising borrowing costs, U.S. companies have largely stood by when it comes to acquiring competitors or selling themselves in recent years.
However, Morgan Stanley CEO Ted Pick stated that this situation is about to change. Pick and Goldman Sachs CEO David Solomon noted that due to increased confidence in the business environment, including hopes for lower corporate taxes and smoother merger approvals, the backlog of merger and acquisition deals at banks is growing. Pick stated on Thursday that Morgan Stanley's trading business is &#34;the strongest it has been in 5 to 10 years, or even longer.&#34;
After experiencing a drought in the past two years, the growing optimism among U.S. companies has prompted them to issue securities and take on more debt to grow their businesses. According to Dealogic, capital market activities, including bond and stock issuance, began to recover last year, growing by 25% from the low levels of 2023. However, without normal levels of merger and acquisition activity, the entire Wall Street ecosystem lacks a key driver of growth.
Pick explained that for investment banks like Morgan Stanley, billions of dollars in acquisitions are at the &#34;top of the waterfall,&#34; as they are high-profit transactions that have a multiplier effect on the entire organization. This is because they create demand for other types of transactions, such as large-scale loans, credit arrangements, or stock issuances, while generating millions of dollars in wealth for executives that need to be professionally managed.
This is also reflected in the earnings reports of major Wall Street banks that have already been released. Thanks to strong growth in investment banking, expansion in asset management, and an unexpected gain of $472 million from a balance sheet bet, net profit increased by 105% year-on-year to $4.11 billion, with diluted earnings per share far exceeding expectations.
Goldman Sachs' performance reported on Wednesday prompted Morgan Stanley senior banking analyst Betsy Graseck to raise her earnings expectations for Goldman Sachs in 2025 by 9%. Graseck stated in a report, &#34;We are discussing the theme of a capital market rebound.&#34;
With the growth of industry trading wallets and the rebound of investment banking activities, it is expected that earnings per share will exceed expectations this year.
The U.S. IPO market is also rapidly recovering. Solomon told technology investors and employees on Wednesday that another slow-growing value creation engine on Wall Street in recent years has been the IPO market, which is also set to rebound. Solomon earlier stated, &#34;There has been a significant shift in CEO confidence. Underwriters have a backlog of deals, and overall appetite for deal-making has improved with the support of a better regulatory environment.&#34;
After several years of stagnation, Wall Street's deal-makers and traders are expected to enter a profitable period. The first batch of fourth-quarter earnings reports from some of the world's largest banks shows signs that 2025 may see a surge in mergers, public listings, and other activities in the high-end financial sector.
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Secondly, market volatility has boosted revenues in Wall Street banks' trading divisions. In the fourth quarter, as investors digested news about the U.S. elections and inflation, many economic indicators, including the yield on 10-year U.S. Treasury bonds, fluctuated.
For example, JP Morgan's trading performance has never been better, with revenues soaring 21% in the fourth quarter to $7 billion, while Goldman Sachs' equity business generated $13.4 billion in revenue for the year, also a record. Bank of America's trading division achieved growth for the 11th consecutive quarter, with revenues from fixed income, foreign exchange, and commodities up 19% year-over-year; the bank stated that this segment's revenue is the highest in a decade.
Citigroup's trading revenue grew by 36%, driven by increased trading volumes in the equity and fixed income markets. Similarly, the equity business was the biggest winner for Morgan Stanley, with quarterly revenues up 51% year-over-year to $3.33 billion, reaching an all-time high for the year; Morgan Stanley's fixed income business grew 42% year-over-year to $1.93 billion.
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Another piece of news has also sent the same signal. According to informed sources, executives from some of Wall Street's largest investment banks are planning to award traders and deal-makers the highest bonuses since the pandemic, with many departments seeing bonuses increase by 10% or more. It is well known that year-end bonuses on Wall Street are highly volatile as the industry cycles between booms and busts. Now, Wall Street investment banks' plans to raise salaries seem to reflect an improvement in business and some optimism for the coming year.
<h2>Net interest income business remains resilient</h2>
Despite the excitement among Wall Street executives and investors about a trading boom in the coming year, not all Wall Street banks are expected to have a strong year. Major Wall Street banks anticipate that net interest income (NII) in 2025 will not replicate the robust growth seen in recent years, but they still expect to maintain some resilience.
NII Under Pressure
JP Morgan expects its core net interest income (excluding the more volatile market segments) to decline slightly, from approximately $92 billion in 2024 to about $90 billion in 2025. Wells Fargo, on the other hand, anticipates a 1% to 3% increase in net interest income, partly driven by more mechanical factors, such as old investments maturing and being reinvested at higher rates.
Banks always warn that these forecasts depend on many factors, including the Federal Reserve's next moves. Currently, as the Federal Reserve is not expected to cut rates as significantly as previously thought, the floating-rate loans of banks and cash reinvestment from maturing bonds or new deposits may provide some benefits, but this also diminishes hopes for a significant drop in deposit costs.
JP Morgan expects its core net interest income (excluding the more volatile market segments) to decline slightly, from approximately $92 billion in 2024 to about $90 billion in 2025. Wells Fargo states that it expects net interest income to grow by 1% to 3%, partly driven by more mechanical factors, such as old investments maturing and being reinvested at higher rates.
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Importantly, the big banks do not anticipate a surge in lending, especially for more traditional commercial borrowers. For example, JP Morgan's Chief Financial Officer Jeremy Barnum stated to reporters on Wednesday that &#34;the tone among small business clients is generally more cautious,&#34; referring to the pressures they have felt from inflation. For instance, as of the end of last year's fourth quarter, JP Morgan's commercial bank loans (including commercial real estate banking and middle-market banking for medium-sized enterprises) decreased by 2% compared to the same period last year.
Secondly, credit card loans at Wall Street banks are expected to continue growing, but not as quickly as in 2024. Last year, credit card loans were still recovering from the pandemic, during which people were unusually eager to pay down debt. This normalization effect may weaken this year, somewhat suppressing year-on-year growth. For example, as of the end of last year's fourth quarter, Wells Fargo's total credit card loans decreased by approximately 3% year-on-year.
Moreover, concerns about the long-term health of American consumers remain. There are currently no signs of a crisis, but credit card delinquency rates have been steadily rising, reaching their highest level in 12 years last year. Most banks also reported an increase in charge-offs for delinquent credit card loans last year
Bankers have indeed indicated that demand for certain loans may rebound later this year, which is a lagging indicator reflecting optimism rather than a leading indicator. However, this may largely depend on the direction of U.S. policy. Higher interest rates, or at least a smaller reduction in rates than previously expected, could undermine the confidence of borrowers such as consumers, especially homebuyers. Tariffs may also impact the revenues and borrowing desires of many companies.
However, NII is still expected to grow
Nonetheless, as the rate-cutting cycle is expected to continue, the yield curve is currently steepening, and the net interest income (NII) of large U.S. banks is still expected to continue growing. The Federal Reserve's rate cuts will lower short-term rates sensitive to policy rates, while Trump's loose fiscal policy will push up long-term rates by increasing bond supply and stimulating the economy.
S&amp;P Global points out that from the perspective of net interest margin, a steepening curve should generally be favorable, and the net interest margin of large banks is expected to continue to expand in 2025 and beyond. Moreover, S&amp;P noted that even if &#34;Wall Street's top dog&#34; JP Morgan predicts a decline in net interest income in 2025, it will rise above 2024 levels thereafter, setting a new historical high. Overall, S&amp;P Global forecasts that the net interest income of the top 20 banks in the U.S. will continue to grow.
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Additionally, S&amp;P analysts also expect that by 2025, the cost of interest-bearing liabilities for all 20 largest banks will decline, and most banks will continue to show a downward trend over the next two years. As of December 12, analysts' median expectations for the group are 3.32% for 2024, 2.64% for 2025, 2.35% for 2026, and 2.23% for 2027.
Kris Lazzaretti, president of data solutions at payment and data company Deluxe, stated that as deposit growth accelerates and deposit costs seem to have peaked, the pressure on bank deposits is easing. However, Matt Pieniazek, president and CEO of Darling Consulting Group, expects the Federal Reserve will need to cut rates at least one or two more times to further accelerate the reduction in deposit costs.
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The U.S. banking industry shows a &#34;Matthew effect,&#34; with Wall Street giants expected to continue outperforming
On the other hand, the caution of consumers or mid-market businesses may not necessarily affect large Wall Street banks. Traders can benefit from all this uncertainty, having the opportunity to bet on the direction of stocks or interest rates. Some corporate clients are turning to the financing market, seeking funds from private credit lenders eager to make deals. This benefits banks' businesses on Wall Street but is detrimental to the growth of commercial or consumer banking
As a result, while the largest, most globalized, and most diversified Wall Street banks may perform well this year, regional or specialized lending banks that rely more on actual loans may not be as active. Many regional lending institutions and credit card lenders will announce earnings in the coming days.
Moreover, after the banking crisis in the U.S. in 2023, depositors, worried about bank failures, flocked to the &#34;too big to fail&#34; large banks for safety, leading to a &#34;Matthew Effect&#34; for these banks. Consequently, while small and medium-sized banks in the U.S. need to pay higher costs to retain depositors, large banks also benefit relatively.
A larger question for investors to consider is whether this trend is part of a larger, more long-term change in lending activity. In other words, banks are no longer lending their own cash but are increasingly acting as channels for investor funds flowing in through non-bank financial institutions.
At the same time, BlackRock announced on Wednesday that its assets reached a record level, with total assets of approximately $11.6 trillion as of last year, a year-on-year increase of 15%, also higher than the previous quarter's $11.5 trillion. This asset management giant has recently made significant bets on non-bank private credit and infrastructure loans. BlackRock CEO Larry Fink also stated that the record asset management scale is &#34;just the beginning.&#34;
Similarly, Goldman Sachs has recently shifted its strategic focus to capital solutions—aimed at providing clients with a range of financing options, such as obtaining loans from private credit funds—which is a tangible indicator of how banks are evolving.
Therefore, even if the expected surge in deal-making by 2025 does not materialize, large investment banks and fund management companies can still profit from the long-term shift towards intermediary services.
<h2>Strong Profits Lead to High Buybacks</h2>
With historic profits in hand, Wall Street's major banks are also increasing shareholder returns. Compilation data shows that the six largest banks in the U.S. are expected to return over $100 billion to shareholders through dividends and stock buybacks in 2024, the highest level since 2021. This is also the largest proportion of profits paid to investors by these companies since before the COVID-19 pandemic.
After a rollercoaster regulatory period, larger buybacks and dividends are back on the negotiating table, following record profits achieved by banks in 2021. However, the following year, strict Federal Reserve stress tests put the brakes on banks in the second half of 2022, and concerns over stricter capital regulations surfaced in 2023.
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It is also worth noting that the Federal Reserve announced on January 6 that Vice Chairman Barr will step down from his role overseeing regulation, effective February 28, 2025, or earlier upon confirmation of his successor. Barr has been a key figure in negotiations related to the U.S. version of the Basel III banking regulatory framework.
As previously mentioned, the new banking regulatory proposal released by U.S. regulators, including the Federal Reserve, in July 2023 requires banks with assets exceeding $100 billion to increase their capital by approximately 16%, with major banks like JP Morgan and Citigroup potentially facing about a 19% increase in capital
The above plan aims to require large banks to hold more capital, providing a buffer against future losses and financial crises, preventing bank bankruptcies and financial turmoil. After the plan was released in 2023, the banking industry launched one of the most intense lobbying efforts in history, opposing such high requirements for the banking sector.
In September 2024, reports indicated that regulators agreed to a comprehensive revision of the proposed package of rules, with the new plan requiring large banks to increase their capital by only 9%. However, subsequent reports indicated that this relaxation of requirements faced opposition from several directors of the Federal Deposit Insurance Corporation (FDIC), with at least three of the five directors opposing it.
For the largest financial companies in the United States, the current situation appears more optimistic. The Trump administration may bring a wave of relief by reducing or eliminating plans that force banks to hold more capital on their balance sheets, which should free up cash, allowing banks to issue more loans and provide more funds to shareholders.
<h2>Conclusion</h2>
The profits of Wall Street's major banks have all exceeded expectations, accompanied by an optimistic tone from executives, creating a very favorable backdrop; this is also the reason why bank stocks rose after the earnings reports were released this week. Overall, by 2025, large, diversified banks may perform better, further expanding their gains. Diversified banks may benefit from multiple sources of income. Large banks may lower deposit rates as interest rates decline; their stronger brand influence and higher liquidity can provide them with a buffer to maintain attractiveness and competitiveness.
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The six major banks on Wall Street reported record performances against the backdrop of increased trading activity before and after the Federal Reserve's interest rate cuts and the U.S. elections. Looking ahead to 2025, Trump's second term may bring looser regulations and tax cuts, stimulating trading and bank fee income. The CEOs of Morgan Stanley and Goldman Sachs stated that corporate confidence in the business environment has strengthened, and they expect a rebound in merger and acquisition activity, with capital market activities already beginning to recover

- U.S. banks reported record earnings due to Federal Reserve rate cuts, increased trading activity around the elections, and a rebound in investment banking.  
- Optimism for 2025 is fueled by anticipated regulatory rollbacks under Trump's second term, which may boost trading and increase banks' fee income.  
- Despite strong profits, banks expect net interest income to remain resilient but not grow significantly, as cautious consumer sentiment and regulatory changes may impact lending activities.

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