Why JPMorgan Chase, Bank of America and Wells Fargo are trading higher

Shares of major U.S. bank stocks rose sharply today after the market was receptive this morning to third-quarter earnings reports that showed bank profits will benefit from more favorable conditions next year. Banks are also likely to benefit from new economic data this morning that showed wholesale prices were lower than expected in September, supporting the view that inflation is continuing to slow.

Shares of JPMorgan Chase (NYSE:JPM) And Bank of America (NYSE:BAC)the country's two largest banks, traded about 4.2% and almost 5% higher, respectively. Shares of Wells Fargo (NYSE:WFC) were trading almost 6% higher.

NII still faces headwinds, but a recovery in investment banking

Both JPMorgan Chase and Wells Fargo reported their third quarter results this morning. JPMorgan beat consensus estimates for profit and revenue and raised its full-year forecast. Management now expects net interest income (NII) – the money banks make on their interest-bearing assets, such as loans, after funding those assets with interest-bearing liabilities, such as deposits – to increase by $1.5 billion in 2024 initially expected to be higher. Management also lowered its cost forecast.

Wells Fargo beat earnings expectations but fell short on revenue. The company also forecasts that NII will decline 9% year-over-year in 2024, which is in the lower range of its previous forecast.

The high interest rate environment of recent years has posed challenges for banks as it has significantly increased financing costs. Consumers and businesses have shifted their funds from free checking accounts to higher-yield products.

Loan and securities yields have also increased. However, we are now at a point in the cycle where asset returns have likely peaked and banks have been unable to significantly reduce the cost of deposits despite the Fed's recent 50 basis point rate cut. This is because deposit prices develop with a lag. In the third quarter, both JPMorgan and Wells Fargo continued to see their net interest margins decline.

Still, improved monetary conditions should support investment banking earnings performance after a two-year slump due to higher interest rates and market volatility.

JPMorgan reported a slight decline in investment banking fees compared to the previous quarter, but continued the positive recovery and is up 30% year-over-year. Investment banking fees at Wells Fargo increased 5% compared to the corresponding quarter and increased 37% year over year.

Better conditions await us in 2025

Ultimately, investors see better days ahead in 2025 due to falling interest rates. Bank stocks are expected to benefit from higher interest rates, but only under a normalized yield curve, which until recently had been inverted over the past two years. A steepening yield curve should ultimately lead to an increase in NII for banks. Lower interest rates and lower volatility also set the stage for higher returns in investment banking and could ease investors' credit concerns.

The story continues

I view the big banks as solid long-term buys. Bank of America is set to report results on Tuesday and is rebounding today on positive trends at JPMorgan and Wells Fargo.

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Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Bram Berkowitz holds positions at Bank of America. The Motley Fool has positions in and recommends Bank of America. The Motley Fool has a disclosure policy.

Why JPMorgan Chase, Bank of America and Wells Fargo Are Trading Higher was originally published by The Motley Fool