Wall Street banks had a blockbuster first half. Higher rates will test the boom.

In the first half of 2026, Wall Street's major banks experienced one of their most lucrative periods in over a decade, but the onset of rising interest rates has raised concerns about the sustainability of this success. As these financial giants prepare to report their third-quarter earnings, beginning with JPMorgan Chase, Goldman Sachs, and Citigroup on Tuesday, followed by Bank of America and Morgan Stanley on Wednesday, investors are eager to see if the recent surge in interest rates is beginning to dampen the profitability seen earlier in the year.

Analysts predict a decline in profits from the previous quarter, with expectations that revenues from trading, mergers and acquisitions, and financing will decrease from the exceptional levels recorded in the second quarter. Despite this anticipated drop, most banks are still expected to report higher profits compared to the same period last year, although Bank of America and Morgan Stanley may not follow this trend.

"At the moment, the outlook seems stable, but the focus is more on potential risks than current conditions," commented Brendan Coughlin, president of Citizens Financial Group, which is set to release its earnings report next week.

The sentiment among investors has turned negative, as the combined market value of these five major banks has decreased by approximately $270 billion since their peak values in the summer, even as the S&P 500 index has risen around 14% this year.

UBS analyst Erika Najarian recently pointed out that much of the banks' recent underperformance can be attributed to the significant increase in long-term interest rates. A survey conducted by Truist Securities earlier this month revealed that only 35% of institutional investors believe bank stocks will outperform the broader market, a sharp decline from 68% in July and 82% in December.

Next week, investors are particularly focused on the implications of higher borrowing costs for third-quarter earnings, as well as whether the rapid adjustment in interest rates will begin to erode the robust activity that characterized the first half of 2026. While higher rates can initially boost banks' lending income, they also increase costs related to deposits and wholesale funding, exert pressure on bond portfolios, and complicate financial calculations for dealmakers.

The pace at which interest rates have changed is also a source of concern. Strategists at Macquarie noted that many significant financial crises in the past five decades have followed sudden shifts in long-term bond yields.

The trading results are expected to provide the clearest indicators of a potential slowdown in Wall Street's activity. In September, bank executives indicated a decrease in trading activity, particularly in fixed-income markets, compared to the heightened activity seen earlier in the spring.

As these banks gear up for their earnings announcements, the overarching question remains whether the remarkable performance of the first half of the year can withstand the pressures of a changing interest rate environment. Investors will be closely monitoring not only the financial results but also any insights into how banks are navigating these challenges moving forward.