Why JPMorgan Chase, Bank of America, and Wells Fargo Are Trading Higher

Shares of major U.S. bank stocks zoomed higher today after the market was receptive to third-quarter earnings reports this morning that showed bank earnings are poised to benefit next year from more favorable conditions. Banks are also likely benefiting from new economic data this morning that showed wholesale prices for September came in lower than expected, supporting a narrative that inflation continues to slow.

Shares of JPMorgan Chase (NYSE: JPM) and Bank of America (NYSE: BAC), the two largest banks in the country, traded roughly 4.2% and nearly 5% higher, respectively. Shares of Wells Fargo (NYSE: WFC) traded nearly 6% higher.

NII still dealing with headwinds, but a rebound in investment banking

Both JPMorgan Chase and Wells Fargo reported third-quarter earnings this morning. JPMorgan beat consensus estimates on earnings and revenue and raised guidance for the full year. Management now expects net interest income (NII) -- the money banks earn on their interest-earning assets, such as loans, after funding those assets with interest-bearing liabilities, such as deposits -- to come in $1.5 billion higher in 2024 than initially expected. Management also lowered its expense guidance.

Wells Fargo topped earnings expectations but fell short on revenue. The company is also guiding for NII in 2024 to be down 9% year over year, which is the lower range of its prior guidance.

The high interest rate environment in recent years has challenged banks because it has significantly increased funding costs. Consumers and businesses moved their funds out of zero-cost checking accounts and into higher-yielding products.

Loan and securities yields have also moved up. However, we are now at a point in the cycle where asset yields have likely topped out, and banks have been unable to meaningfully lower deposit costs despite the recent 50-basis-points cut by the Fed. That's because deposit pricing moves on a lag. In the third quarter, both JPMorgan and Wells Fargo continued to see their net interest margins contract.

Still, improved monetary conditions should help revenue trends in investment banking activity after a two-year slump caused by higher interest rates and market volatility.

JPMorgan reported investment banking fees slightly down from the prior quarter, but they continued the positive rebound and are up 30% year over year. Investment banking fees at Wells Fargo rose 5% from the linked quarter and are up 37% year over year.

Facing better conditions in 2025

Ultimately, investors see better days ahead in 2025 due to falling interest rates. While bank stocks are believed to benefit from higher interest rates, that's only under a normalized yield curve, which, up until recently, has been inverted for the last two years. A steepening yield curve should eventually lift NII at banks. Lower rates and less volatility also set the stage for higher revenue in investment banking and could quell investor concerns about credit.

I view the large banks as solid long-term buys. Bank of America will report earnings on Tuesday and is rallying today on positive trends seen from 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 has positions in Bank of America. The Motley Fool has positions in and recommends Bank of America. The Motley Fool has a disclosure policy.