Market Summary
Corporate earnings were resilient enough to offset macro-driven concerns last week, with easing rate cut expectations still intact and relatively strong buy-the-dip interest following the previous week’s pullback. AI-related tech was once again at the center of renewed momentum with mixed, yet overall positive, earnings results from major banks overshadowing weakness within their regional counterparts. On the policy front, the government shutdown continues to delay economic releases alongside ongoing trade tensions between the U.S. and China.
Fed Policy and Market Expectations
Fed Chair Powell’s speech reiterated the likelihood of additional rate cuts before year-end. Powell described the current economy as being pulled in different directions: strong growth in some areas, yet a cooling labor market and still-elevated inflation risks. On the labor front, hiring is relatively weak with an increased downside risk to employment. The inflation story remains much the same – it has come down significantly yet still above the Fed’s long run goal of 2% with the uncertainty of tariff-driven inflation continuing to complicate the outlook.
The previous rate cut in mid-September was characterized as a preemptive cut in response to employment risks. Going forward, it seems the scale has tilted towards the Fed focusing on the softening labor market. Still, Powell noted the Fed is not on a preset course and will respond to incoming data – hinting that policy may remain restrictive if inflation re-accelerates.
In the near-term, policy risk is tilted towards employment data, of which most indicators have been delayed to the government shutdown. While the market is bullish in terms of rate cut expectations, sharperthan-expected decline in employment data could force the Fed into more aggressive cuts. As of now, the market is content with the balancing of Fed policy, which has given the green light for further momentum in risk assets if earnings hold up.
Earnings
The major U.S. banks delivered broadly strong third-quarter earnings last week, showing resilience amid slowing economic momentum and early Fed rate cuts. While results varied by segment performance, healthy trading, improving investment banking, and disciplined cost control supported profitability across the group. As if often the case from the banks, management commentary highlighted vigilance around geopolitical risks, persistent inflation, and uneven consumer dynamics.
Capital markets (investment banking) activity rebounded sharply, boosting advisory and underwriting fees by double digits across nearly all major banks. M&A pipelines and IPO markets improved following a two-year slowdown.
Fixed income and equity trading revenues surged, particularly at JPMorgan and Morgan Stanley, driven by client activity and market volatility. Return on equity ranged from 11% to 18% across peer institutions, supported by cost discipline and technology-enabled productivity gains. In terms of credit quality, loan loss provisions declined at Bank of America and Wells Fargo, signaling improved asset quality and disciplined risk management.
Regional Bank Volatility The market received a bit of déjà vu from early 2023 with regional banks seeing a bout of volatility after Zions Bancorporation and Western Alliance Bancorp revealed significant loan losses and fraud related exposures, prompting widespread selling across the group. Zions announced a $50 million charge-off tied to commercial loans, while Western Alliance cited legal action over falsified borrower documents. The S&P Regional Banks Select Industry Index fell over 6% in a single session – its steepest drop since April 2025 – before stabilizing late in the week.
Market sentiment calmed after the excitement was deemed isolated rather than systemic but still highlighted the potential for broader stress within commercial lending portfolios and exposure to private credit markets. Our portfolios steer away from regional bank exposure primarily because they fall short of meeting our investment criteria as they tend to face structural disadvantages relative to their large cap peers.
Week Ahead
This week, earnings season will pick up with Netflix (NFLX) and Tesla (TSLA) headlining a slew of key reports throughout the week. While the government shutdown continues to delay most economic releases, investors will still see inflation readings for September set to release on Friday – the next FOMC rate decision will be on October 29th.
As always, if you have any questions or comments please do not hesitate to reach out.
Michael Neill, CFA