Banks can thank the Trump trade.
Wall Street firms including Morgan Stanley (MS) and Citigroup (C) are expected to post blow-out bond-trading results for the first quarter, the second straight period in which President Donald Trump's surprise election has produced a windfall.
Total trading revenue probably jumped 15% from a year earlier, according to Deutsche Bank. Investor optimism over Trump's proposals to stimulate the economy with tax cuts and spending led to greater confidence in corporate bonds during the first quarter, driving price gains. A boom in new debt issuance by companies drove a frenzy of transactions in the secondary market.
The banks also probably saw a 20% jump in investment-banking fees, as more companies sold shares through initial public offerings amid a surge in U.S. stock-market valuations.
"Banks, and the overall market, have been riding a wave of optimism since President Trump's win," RBC analyst Gerard Cassidy wrote in a March 28 report. Earnings per share at the largest banks probably climbed 5.4% on average, Cassidy estimates.
The bond bonanza marks a dramatic turnaround from the first quarter of 2016, when the big U.S. banks' results were soured by fears of a slowdown in the Chinese economy and tumbling crude prices that raised the prospect of mass bankruptcies by energy producers. Since then, China has managed to stave off a big devaluation of its currency, while a recovery in oil has allowed lenders to reverse big loan-loss reserves they had previously booked.
Then in November, Trump's election sparked optimism that government stimulus would turbo-charge the U.S. economy and kindle loan growth, and that the new president would roll back costly regulations and capital requirements enacted in the wake of the 2008 financial crisis. Interest-rate increases by the Federal Reserve - typically used to put the brakes on the economy - were instead welcomed by analysts as a source of relief from shrinking loan margins.
Whether the upswing can last will be a big question for analysts as bank executives host quarterly conference calls starting Thursday with JPMorgan Chase (JPM) , the largest U.S. bank.
Loan growth has slowed this year to about 5%, from a fourth-quarter pace of 7.2%. Investors are becoming increasingly concerned about the potential for loan losses in the retail industry, according to Barclays, as chains including Macy's (M) , J.C. Penney (JCP) and Sears (SHLD) plan to shutter some 3,500 stores over the next few months. And stock-trading results have been sluggish -- U.S. volumes were down 20% in the first quarter -- despite big gains in the S&P 500 Index, according to Credit Suisse.
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There's also the risk that Trump's plans to slash corporate taxes and remove regulatory fetters from the banking industry could get hung up in Congress, especially given the internecine Republican feuds in the House of Representatives that scuttled his pledge to overhaul health-care legislation.
But so far, Trump has been mostly a godsend for Wall Street, with large bank stocks up 43% in the past 12 months, almost triple the gains during the same period in the S&P 500.
Morgan Stanley is predicted to have the biggest jump in first-quarter bond-trading revenue, with an 85% increase from a dismal performance a year earlier, according to Deutsche Bank. Goldman Sachs (GS) could see revenue from the business climb 26%, followed by Bank of America (BAC) with 25%, Citigroup at 20% and JPMorgan at 15%.
"The macroeconomic and financial data in the first quarter is pointing to a decent environment for fixed income," Brian Kleinhanzl, an analyst at brokerage firm KBW, wrote in an April 4 report.