So far, financial firms have generally benefited from the extreme market volatility that erratic U.S. policy has produced, but they also face growing risks, which could weigh on future earnings.
In their first quarter results, the large U.S. banks reported higher earnings, boosted by record trading income, robust net interest income, and modest expense growth, Fitch Ratings noted in a new report.
Yet, these positive results may not be repeated in the months ahead, as the same policy shifts that caused market volatility to spike have also created extreme uncertainty, undermined business and consumer confidence, and led to a downgrade in global economic forecasts — raising the prospects of recession in the U.S. and elsewhere, and possible stagflation.
The U.S.-led trade war has “resulted in materially lower growth forecasts for 2025 and 2026, while the risks of a US recession, stagflation and capital market volatility have become more acute,” Fitch said in a separate report.
In turn, the trade policy uncertainty, potential retaliation, and its economic and financial market impacts “raise doubts about the ability to imply future bank performance from first quarter results,” it noted.
While the banks largely affirmed their prior guidance for revenues, expenses and credit quality, Fitch said that their confidence on economic growth, rates, unemployment and investment banking activity has eroded.
For instance, “Banks have observed a cautious sentiment among corporate clients, who show muted appetite for utilizing credit lines or pursuing capital markets fundraising under current conditions,” it said.
Indeed, the trade conflict “raises significant uncertainties for global credit,” it said.
“The uncertainty surrounding U.S. trade policy, given exemptions and pull-backs from initially announced measures will also dampen investment, and weigh on growth and investor risk appetite,” it added.
On the bright side, banks are facing this period of extreme uncertainty, “with relatively strong loss absorption capacity,” Fitch noted — as the banks’ common equity tier 1 capital ratios remain at, or near, multi-year highs.