Volatility is back in U.S. stock markets, and that means Wall Street's trading profits are rebounding after an abysmal 2017.
Big U.S. banks led by Action Alerts PLUS holding JPMorgan Chase & Co. (JPM) could report an average 28% gain in earnings per share for the first quarter when they begin posting results Friday, driven by stronger stock-trading revenue and the recently enacted tax cuts, according to analysts at the brokerage firm Keefe, Bruyette & Woods.
Stock markets are seeing bigger fluctuations this year amid speculation over signs of accelerating inflation, the pace of Federal Reserve rate increases, U.S. trade tensions with China and the data-privacy scandal at Facebook Inc. The Cboe Volatility Index, a key gauge of market volatility known as the VIX, was 43% higher on average during the quarter.
The resurgence in volatility has prodded investors out of last year's languor, when unusually calm markets kept investors on the sidelines and left few opportunities for traders at Wall Street banks to score gains on big price swings. First-quarter trading revenue at the biggest Wall Street firms likely rose about 8% on average from a year earlier, KBW estimates, contrasting with a 2017 in which stock-trading fees slid by 3.5% and bond-trading revenue tumbled by 20%.
"We expect a broadly positive quarter for capital markets across products, driven by strength in equities trading from volatility experienced in February," Goldman Sachs Group Inc. (GS) analyst Richard Ramsden wrote in an April 2 report.
The trading rebound comes as banks are already benefiting from President Donald Trump's tax-cut law passed in December, as well as from higher interest rates that have fed lending profits - especially since the biggest U.S. banks have barely increased deposit rates.
Higher volatility in the first quarter spurred increases in trading activity in U.S. and European stocks as well as heightened demand for transactions in other products like bonds and foreign exchange, according to RBC Capital Markets.
Goldman Sachs, historically a Wall Street powerhouse, had such horrible trading results last year that CEO Lloyd Blankfein was forced to announce a plan in mid-year to rejuvenate the firm's earnings by expanding into new areas like corporate lending.
According to KBW, the firm may have posted the best improvement in trading results in the first quarter, with total revenue from the business up 20% from a year earlier.
Citigroup Inc.'s (C) trading revenue probably rose by an estimated 8.2%, while JPMorgan's climbed 7.8% and Bank of America Corp. (BAC) and Morgan Stanley (MS) each saw growth of 7.7%, KBW estimated in an April 4 report.
Now watch Wells Fargo Securities bank analyst Mike Mayo weigh in on bank stocks: