JPMorgan Chase's Next Earnings Report Tomorrow Could Send the Stock Plunging. Here's Why.

As it does each quarter, JPMorgan Chase (NYSE:JPM), the largest bank in the U.S., will kick off earnings season tomorrow morning by releasing its third-quarter results before the market opens. Then management, led by CEO Jamie Dimon, will host a live conference call with analysts.

Investors across the market are always interested in what the big banks, particularly JPMorgan, have to say because they serve as a pulse check on the economy, showing how consumers and businesses are holding up.

Bank stocks have also come under pressure amid soaring bond yields, which can affect banks in various ways. Here's why JPMorgan's earnings report tomorrow could send the stock plunging.

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How rising bond yields are pressuring bank stocks

Rising bond yields have taken their toll on the stock market, and the big banks have not been spared. Banks are a very interest-rate-sensitive business, so it makes sense.

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Bond yields increase banks' funding costs and raise the cost of capital in the capital markets, which can slow investment banking activity. They can also slow lending activity by making borrowing more expensive.

While bond yields will also increase interest income, potentially boosting revenue in bank loan portfolios, they can also put pressure on borrowers with adjustable-rate loans and those refinancing.

That's why bank credit will come into focus. It's been benign for a very long time now, and higher yields will make investors more nervous about a credit cycle.

Still, the full effects of rising bond yields may not be felt just yet, and JPMorgan largely expects a robust third quarter for investment banking and trading.

During a conference on Sept. 15, JPMorgan Chase Co-President Doug Petno said the bank expects investment banking fees and markets revenue ​to grow in the "mid-to-high teens" percentage range in the third quarter.

In the second quarter, these businesses posted blistering numbers with investment banking fees up 30% year over year and 14% from the previous quarter. Markets' revenue, which can be influenced by trading activity, blasted 35% higher year over year.

That's a tough comparison, especially for investment banking, which had its best quarter since 2021. Major initial public offerings, such as Space Exploration Technologies Corp, contributed to the banner second quarter.

Still, if Pento's guide comes to fruition, that would still be very solid.

"We ⁠started this quarter with a strong pipeline that continues. I touched on management and board confidence-that's ​driving tremendous amount of M&A activity. It's as high as we've seen in some time," he said during the September conference.

Investors will be looking to poke holes

Although rising bond yields have been somewhat priced in over the past month, they could still pressure parts of JPMorgan’s business, and I think investors will be very cautious about any signs of weakness.

Wall Street analysts, on average, expect the bank to report $5.94 in adjusted earnings per share on revenue of $51.22 billion.

Furthermore, management last quarter guided for full-year net interest income of $105.5 billion, including market revenue. Adjusted expenses are projected at $107.5 billion.

Investors may sell the stock if the bank fails to beat estimates or uphold its full-year guidance. Ultimately, I do feel that investors have a high bar heading into earnings, and more could go wrong than right.

For instance, while Pento gave solid investment banking and markets guidance, it still has a tough comparison to the second quarter, and there have been rumblings that investment banking and trading activity is set to slow.

While the economy has been resilient, investors have been anticipating a credit cycle for some time, so any signs of deteriorating credit quality could trigger a sell-off.

I don’t necessarily expect the quarter to be a disaster, but the slightest miss or any signs of concern could lead the market to press the sell button.

JPMorgan Chase is an advertising partner of Motley Fool Money. Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.