Wells Fargo turnaround, JP Morgan stumble shake bank sector

The bank index fell 9.5% last month heading into earnings season, but JP Morgan's stumble on trading revenue contrasts sharply with Wells Fargo's net interest margin beat. Trading and capital markets fell sequentially, but equity trading reached $5 billion, up 49% year over year—the second-best result in company history. Wells Fargo, by contrast, showed the turnaround working: net interest margins beat expectations, expenses came in lighter than forecast, and provisions also fell shorter than anticipated.

The bank index had dropped 9.5% in the month leading into earnings season. Q3 is seasonally softer than Q2, which produced record results. Wells Fargo stock trades at 1.5 times book value after falling 10% for the year, and now that the asset cap has been lifted, the company can start capturing market share again.

Link sees Wells Fargo as the better opportunity at the current valuation.

Banks knew going in that concerns about interest rates, macroeconomic conditions, and artificial intelligence would slow business sequentially from Q2's heights. Despite those headwinds, the fundamentals remain solid: loans, deposits, net interest margins, net interest income, return on equity, and profitability all held up.

This mix of puts and takes defined the earnings season, with deterioration visible in sequential comparisons but strength visible when measuring year over year.

JP Morgan initially bounced on its earnings but turned negative, sliding from down 7% to down 12%. Goldman Sachs and Citigroup have not yet reported, and Goldman is expected to miss on expenses.

Link attributes the selling to a high bar for performance in the current environment. "You have to beat and raise in this environment," she said, meaning positive surprises alone do not drive rallies when expectations are already compressed.

The latest bank results were not surprising, especially after conference season just a couple of weeks prior had aired many of the same themes and concerns. Expectations had already been marked down heading into the earnings calendar.

That combination—pre-telegraphed results and low expectations—makes Link puzzled by the negative stock reaction she is seeing.

The broader economy is expanding at 3.5-4%, and earnings continue to grow. The S&P 500 has doubled in the past four years, a trajectory supported by persistent growth.

That economic resilience provides a floor under the market even as bank stocks struggle on sector-specific concerns.

The consumer remains strong, and banks are not reporting outsized additions to loan losses. Credit quality still appears good across the sector.

This absence of stress contradicts recession scenarios and underpins the case for continued economic resilience.

Link flags 6% as a potential inflection point where rate pressure could start to materially impact spending and borrowing.

Until that threshold is reached, current rate levels remain manageable for households carrying mortgages and taking on other debt.

The artificial intelligence opportunity is not limited to capital expenditure from hyperscalers like Amazon, Google, and Microsoft. Data center makers are benefiting, power grid infrastructure is benefiting, and the power sector is benefiting—a broad swath of suppliers and infrastructure vendors across the food chain.

That distributed benefit reduces the risk that AI gains are concentrated in a handful of companies and suggests the tailwind can sustain broad-market performance.

Full employment at 4.1-4.2% is bolstering consumer confidence and spending power. Combined with the AI-driven productivity opportunity spreading across the economy, the market has two structural tailwinds at work.

Link sees that combination continuing to support equity valuations even as sector-level earnings surprise to the downside.

It is still early innings to measure whether artificial intelligence will permanently displace workers. New jobs created by AI do not yet exist in measurable form, just as the Internet did not predict the job categories that emerged around web development, digital marketing, and software engineering.

The same displacement fears that attended the Internet's rise proved overblown; Link applies that historical lesson to AI concerns today.