Market turbulence, Wall Street's big harvest: Trading frenzy brings surprising performance

According to the financial news app Zhitong Finance, after experiencing a trading frenzy driven by government spending and low interest rates caused by the epidemic, large U.S. banks have seen a surge in trading activities due to increased volatility. Despite concerns in the market about interest rate hikes and economic prospects, banks such as Goldman Sachs (GS.US), Bank of America (BAC.US), Citigroup (C.US), and JPMorgan Chase (JPM.US) all exceeded expectations in the third quarter, indicating that they have found ways to sustain growth in prosperous times. The trading volumes of stocks and fixed income of these banks reached historic highs, and net interest income also increased, demonstrating that loan income has shown relative resilience to the recent rate cuts by the Federal Reserve.

In this uncertain quarter, Wall Street's trading departments unexpectedly reaped profits. The stock and fixed income trading volumes of Goldman Sachs, Bank of America, Citigroup, and JPMorgan Chase all exceeded analysts' expectations, especially with stock traders achieving their best third quarter on record. The market's sharp fluctuations and investors' close attention to economic data led to significant volatility in the S&P 500 Index and the VIX Index.

Goldman Sachs CEO David Solomon mentioned in the earnings conference call that clients globally have been very active, benefiting from the need to constantly engage, reposition, and reshape in an uncertain environment.

Furthermore, high interest rates are favorable for banks as they can absorb cash in the form of deposits and generate fees through lending. The average net interest income of Bank of America, Citigroup, and JPMorgan Chase grew by 3%, showing that loan income has demonstrated resilience to the recent rate cuts by the Federal Reserve.

The good times in the trading hall continue, especially after executives of major banks lowered their expectations at an industry conference in September. Goldman Sachs' unexpected growth can be seen as a reversal of fate, as Solomon had previously indicated that trading revenue might decline by 10% compared to the same period last year with only three weeks left in the quarter.

Bank of America also reported positive performance, with its stock, fixed income, foreign exchange, and commodities trading revenue growing by 12%. While CEO Brian Moynihan announced revenue growth in the single digits last month, Jim DeMers, head of the bank's markets division, pointed out that the increase in trading volume has created a "favorable stock investment environment."

Citigroup's CFO Mark Mason attributed the surge in stock trading revenue to growth in the index and individual stock trading departments. He stated that the company's algorithmic trading and high-touch trading activities also saw significant growth.

Morgan Stanley is set to announce its third-quarter performance on Wednesday, with analysts expecting a 2.2% increase in trading revenue and believing that the growth in stock earnings is sufficient to offset the decline in fixed income. Morgan Stanley has long been the largest stock trading company on Wall Street, but in recent years, it has relinquished this title to Goldman Sachs Moody's rating analysts pointed out that the average quarterly income of debt and equity traders at the five largest banks in the United States is expected to exceed $25 billion from 2020 to mid-2024, far surpassing the less than $20 billion during the period from 2014 to 2019.

Despite the overall outperformance in trading results, the performance of investment banking businesses has been mixed. The trading frenzy of 2021 has largely subsided, but there is hope that a decrease in interest rates will stimulate merger activities, thereby aiding traders. Goldman Sachs' equity underwriting revenue was around $1.2 billion in the third quarter of 2021, triple that of the past three months. Earnings for this quarter have increased by 45% to nearly $3 billion, exceeding expectations.

This success has caught banks off guard, with executives maintaining low expectations. Goldman Sachs' Solomon predicted a decline in trading volume last month, but the actual situation turned out differently. JPMorgan Chase's Jamie Dimon holds a pessimistic view on the economy, but the bank believes that rate cuts will only lead to a shrinkage in net interest income for a few quarters before resuming growth in the second half of 2025.

Overall, large banks may emerge from the most chaotic period in recent years in a stable state, ready to embrace a frenzy of mergers and initial public offerings when funds become cheap again. The new normal that people are concerned about may never materialize, and banks may find that they do not need it.

Figure 2

While executives are optimistic about the Federal Reserve's ability to achieve a soft landing, they also warn that lingering uncertainties may affect this trajectory. JPMorgan Chase CEO Jamie Dimon stated after the bank exceeded most expectations: "I have made it very clear that I think the future could be quite turbulent."