The excitement surrounding the new earnings season for US stocks has officially commenced, with financial giants such as Goldman Sachs, Morgan Stanley, and JPMorgan Chase taking the leadThe performance reports from these Wall Street powerhouses and their projections for the future are expected to have a significant impact not only on the US stock market but also on global marketsThis is particularly crucial in the current climate where the so-called "anchor of global asset pricing," the 10-year US Treasury yield, has been pressuring equities and other risk assets, creating an atmosphere of anticipation for an upsurge as these financial titans reveal unexpected growth results.

Recent trends have shown that the yield on the 10-year Treasury has surged, reaching a new high for the month of October 2023. As a result, the US stock market has entered a downward adjustment stage under the mounting pressure from rising Treasury yields

There exists a notable inverse relationship between Treasury yields and stock performance; specifically, when the yield of the 10-year note rises, major benchmarks like the S&P 500 are often met with significant declinesThus, positive economic news that propels Treasury yields upward—such as robust employment statistics or strong consumer price indices—tends to spell trouble for risk assets, including equities.

From a theoretical perspective, the 10-year Treasury yield is analogous to the risk-free rate in the widely utilized Discounted Cash Flow (DCF) valuation model for stock marketsWith other indicators, especially the cash flow forecasts, remaining constant, a higher denominator (i.e., the risk-free rate) poses a risk to the valuations of historically high-priced tech stocks and high-yield corporate bondsShould the cash flow expectations increase beyond forecasts during this earnings season, it could substantially widen the pricing range for equities and other risk assets

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Given that cash flow predictions are heavily reliant on the earnings reports issued during this season, any upward revisions in profit estimates are pivotal in shaping market attitudes towards risk assets.

As the earnings season kicks off, companies comprising the S&P 500 index will successively unveil their fourth-quarter results and guidance on expected profitsAnalysts are hopeful that data aligning with or exceeding their forecasts could significantly elevate the sentiment among US stock investorsAnalysts from Bank of America have noted that options trading implies that the average volatility of individual stocks within the S&P 500 could swell by as much as 4.7% post-earnings announcements, potentially marking a record for single-day earnings volatilityThis anticipated fluctuation underscores the prevailing market uncertainties, particularly concerning inflation volatility and the prospects of further interest rate cuts by the Federal Reserve, which have left investors feeling somewhat anxious

Thus, investors and hedge fund traders are now averting their gaze towards this earnings season, seeking solace in the hope that American corporations are faring well.

JPMorgan Chase is set to release its earnings report on Wednesday before the market opens, thereby formally launching this quarter’s earnings reportsThis occasion not only serves as a pivotal stress test for a US stock market that has rebounded vigorously over the past two years but also represents a focal point for market observersAccording to recent data from Bloomberg’s industry research, analysts are broadly anticipating that earnings for S&P 500 companies will soar by 7.5% in the fourth quarter—marking the second-highest pre-season forecast in three years, which sets a remarkably high bar for corporate performance.

As noted by Larry Adam, Chief Investment Officer at Raymond James, “The fourth quarter earnings season could be one of the most pivotal ones we have seen in some time.” The likelihood of the Federal Reserve rapidly cutting rates, as investors had hoped last year, appears slim; they have shifted towards a more hawkish stance that maintains prolonged high rates, making corporate performance even more crucial for boosting bullish sentiment in the market

Historically, performance metrics have been one of the leading drivers behind rising stock markets.

Analysts foresee a slight dip in overall earnings per share (EPS) for the US banking sector compared to a solid third quarter but still anticipate significant year-on-year growthThis is notable despite the Federal Reserve having slashed rates by 100 basis points in the past quarter, with benchmark interest rates still positioned relatively high.

The prevailing high-interest rates and the normalizing yield curve among US Treasuries are likely to propel greater net interest income growth for commercial banks in the fourth quarter and the subsequent quartersFurthermore, robust activity in capital markets is expected to drive non-interest income via healthy fee-related revenues, indicating a potential ongoing recovery in investment banking activities.

Analysts project that fourth-quarter results won’t set new records and predict a quarter-on-quarter decline

However, there have been improvements in consensus expectations over the past six months across the majority of major financial centersFor instance, the consensus EPS prediction for JPMorgan Chase in the fourth quarter rose to $4.04, reflecting a 3.8% increase in the past month and a 7.7% increase over six months.

Optimism has also surged around expectations for Morgan Stanley’s fourth-quarter EPS, largely fueled by anticipated trading gains from the US stock market's performance during November and December, alongside a recovery in IPOs benefiting investment banking segmentsAnalysts have increased the consensus EPS forecast by nearly 14% over the past six monthsKenneth Leon from CFRA has predicted that strong economic growth in the US will bolster loan growth, thereby allowing net interest income to enjoy “modest growth” that could be offset by weaker segments.

Brian Moynihan, the CEO of Bank of America, has recently stated that the bank is witnessing loan growth exceeding the industry average and an increase in deposits, while the reliance on high-cost deposits is declining

Analysts are expecting Bank of America’s net interest income for the fourth quarter to reach $14.3 billion, up from $14.1 billion in the third quarter.

According to Betsy Graseck, an analyst at Morgan Stanley, the impending earnings releases could result in strong growth for capital market-related revenues among the Wall Street banks in the fourth quarter, particularly in trading and equity capital markets, which are likely to exceed expectationsGraseck included JPMorgan Chase and Citigroup as preferred stocks for the anticipated stock market rebound.

Graseck further expressed optimism regarding capital market performances pushing significant operational leverage upwards, as the revenue growth aligns with stable or declining compensation ratios and lower non-compensation expense ratios.

Leon's insights from CFRA suggest that both Goldman Sachs and Morgan Stanley are in favorable positions to harness substantial capital market activities, which could cement their leadership in the investment banking landscape

In contrast, Bank of America and Citigroup seem more inclined towards traditional banking operations, while JPMorgan Chase maintains a more balanced business distribution.

UBS analyst Erika Najarian has pinpointed several favorable trends for banking titans, including the revitalization of capital markets, expectations of regulatory easing in the US, rising yields, strong credit quality, and anticipated nearing absolute upper limitsIn her recent report, she remarked that these factors could lead to positive adjustments in EPS, with financial centers likely to feel a pronounced impactBanks such as Bank of America, Wells Fargo, PNC Financial Services, and Huntington Bank are among her top picks.

Vivek Juneja, an analyst at JPMorgan Chase, has highlighted that a robust investment banking environment, especially in equity underwriting and syndicated loans, should support earnings in the fourth quarter