It’s earnings week on Wall Street. Are markets at risk again?

Wall Street is on edge. The big banks—Citigroup, JPMorgan Chase, Goldman Sachs, and Wells Fargo—are about to release their earnings, and the stakes couldn’t be higher.

Jefferies Financial Group already kicked off the season with numbers that disappointed the market. Combine that with a shockingly strong jobs report last week, and you’ve got investors biting their nails.

The Federal Reserve isn’t cutting interest rates anytime soon, thanks to those job numbers, and that means the market is in for a bumpy ride.

Last year, bank stocks crushed it, climbing 33% and leaving the S&P 500 in the dust. But that was 2024. This year is already shaping up to be a different story. Expectations are high, sure, but so are the risks.

Banks thrived on a booming stock market, a wave of deals, and easy money policies. Now, every move from the Fed and every word from bank executives about the future is under a microscope.

Big expectations, bigger questions

The last quarter of 2024 wasn’t exactly quiet. Election-fueled volatility shook up the markets, keeping trading desks busier than usual. Analysts at Morgan Stanley said December didn’t follow the usual script. There wasn’t the typical slowdown in activity, which could mean a bump in trading revenues.

Citigroup and JPMorgan have already hinted that their numbers might look good because of this. Investors are hoping that’s true, but there’s a lot more riding on these reports.

Investment banking revenue and profit margins didn’t hit Wall Street’s expectations. That’s a big deal because a strong year for initial public offerings (IPOs) was supposed to help boost bank profits.

But market volatility and the specter of tariffs under the incoming Trump administration are throwing cold water on those hopes.

Still, some analysts are optimistic. Barclays’ Jason Goldberg thinks Trump’s pro-business policies—tax cuts, deregulation, you name it—could be game changers. But not everyone is buying the hype.

Borrowing remains weak, and corporations are holding back, waiting to see how the political and economic situation shapes up. But with expenses rising, the math has to work. Banks need to prove they can grow revenue faster than costs, or the market won’t be forgiving.

The Fed, the market, and the inflation puzzle

The Federal Reserve isn’t making things easier. Last week, Boston Fed President Susan Collins made it clear that interest rates aren’t moving down anytime soon. “Considerable uncertainty” is the phrase she used to describe the economic outlook.

Inflation is slowing, but not fast enough. The Fed’s favorite gauge showed prices up 2.4% in November, with core inflation at 2.8%. Both are still above the central bank’s 2% target, so rate cuts are off the table for now.

Higher bond yields are good news for banks—on paper, at least. They boost net interest income and profit margins. But there’s a flip side: higher yields mean more pressure on consumers. Household budgets are already stretched, and this could slow down borrowing even more.

For banks, that’s a double-edged sword. Sure, they make more on the money they lend, but they also lend less when consumers and businesses tighten their belts.

Investors are also worried about the broader market. Last Friday, the S&P 500 had its worst day since December 18, dropping 1.5%. The KBW Bank Index, which tracks the biggest bank stocks, fell 2.7%. That’s not the kind of momentum you want heading into earnings week.

If the big banks don’t deliver solid results—or at least reassure investors about the future—things could get uglier. Fed officials aren’t exactly singing a happy tune, either. Michelle Bowman, a Fed governor, shared Collins’ cautious stance.

She said rate cuts won’t happen until inflation shows real progress. And even then, don’t expect a rapid turnaround. The Fed is taking its time, and that means banks and investors will have to adjust to a slower, more deliberate policy approach.

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