Year-over-year inflation dropped from a four-decade high around 9% a year ago to just 3% in June. And the S&P 500 is now up roughly 18% year-to-date. “The market has been partying like it’s 1999,” Deutsche Bank strategist Jim Reid wrote in a Friday note, arguing the rally is “showing no sign of letting up” amid investors’ “growing hopes of a soft landing.” 

It’s got Americans feeling optimistic. The University of Michigan’s Consumer Sentiment Index jumped to 72.6 in July from 64.4 last month—the highest in nearly two years, and the largest month-over-month increase since December 2005. In similar spirits, multiple big banks reported strong earnings on Friday. Both JPMorgan Chase and Wells Fargo managed to top Wall Street’s consensus estimates for revenue and earnings in the second quarter as higher interest rates from borrowers boosted the lenders’ net interest income.

Despite leading Wall Street’s big earnings boom, JPMorgan CEO Jamie Dimon still isn’t convinced a “soft landing” is guaranteed. He noted Friday that “salient risks” remain on the horizon, from stubborn inflation to slowing consumer spending. And with competition over deposits growing as interest rates rise, giving Americans alternatives to banks’ savings accounts in places like U.S. treasuries, JPMorgan anticipates its net interest income boom ending soon. 

But that doesn’t mean Dimon is bearish. “The U.S. economy continues to be resilient,” the CEO wrote in a press release accompanying JPMorgan’s earnings results Friday.

Big banks blast past expectations

JPMorgan managed to pull in $41.3 billion in revenue in the second quarter, topping analysts’ consensus expectations for $38.9 billion. Net income also surged 67% from a year ago to $14.4 billion. The bank benefitted from rising interest rates, enabling it to pull in $21.8 billion in net interest income, a 44% year-over-year jump. It also raised its full-year guidance for net interest income in 2023 to $87 billion, $3 billion higher than May’s forecast.

Dimon and company netted a $2.7 billion gain from their takeover of the failed First Republic Bank earlier this year as well. The CEO called it another “quarter of strong results” Friday, and his bank wasn’t the only one that outperformed in the second quarter.

Wells Fargo pulled in $20.5 billion in revenue compared to analysts’ consensus forecast for $20.1 billion. The bank’s net income also surged 58% year-over-year from $3.1 billion to $4.9 billion. “Our company remains strong and we have significant opportunities to continue to improve how we serve our customers,” CEO Charlie Scharf said in a press release accompanying the earnings report. 

However, like Dimon, Scharf noted that although the U.S. economy is exceeding expectations, it’s still in an uncertain state and will likely continue to slow.

Meanwhile, Citigroup’s revenues hit $19.4 billion and pulled in earnings of $1.33 per share, surpassing consensus estimates for $19.3 billion and $1.30, respectively. Higher interest payments from borrowers led to an 18% year-over-year jump in net interest income in the second quarter, helping the bank overcome a 13% decline in Markets division revenues and 24% drop in investment banking fees, much to Wall Street’s surprise. 

Big banks’ big problem

Big banks’ second quarter earnings have impressed analysts so far, but there’s one key headwind that could hold them back moving forward. While rising interest rates have led to higher interest payments from borrowers this year, boosting banks’ net interest income in the near-term, lenders will eventually have to cough up more interest to their depositors to beat competition—meaning their net interest income will take a hit.

As of July 10, the national average savings accounts yield was just 0.53% percent, according to Bankrate data. That’s prompted more and more consumers to seek higher-yield savings options in the form of certificates of deposit (CD) or U.S. Treasuries. Six-month Treasury Bills, for example, currently yield nearly 5.5%.

This explains why, even though JPMorgan raised its full-year outlook for net interest income to $87 billion in June, its CFO Jeremy Barnum warned in the firm’s second quarter earnings call that the figure will probably be “substantially below this quarter’s run rate at some point in the future, as competition for deposits plays out.” 

Charles Peabody, an analyst from Portales Partners, asked for further clarification from Barnum about the impact of competition for deposits during the earnings call, noting that JPMorgan has a “medium-term” forecast for net interest income that’s roughly $12 billion lower than what they expect to net in 2023. 

Barnum told Peabody that “relatively small changes” in deposit interest rates amount to “a lot of money when you’ve got a couple of trillion dollars of deposits.” When a customer shifts from a near-zero interest rate savings account to a 4% interest rate CD, it is “obviously a big impact on margin,” he said.

He pointed to a slide from JPMorgan’s fourth quarter 2022 earnings report showing that every .01% increase in firmwide average deposit costs leads to a roughly $250 million increase in interest expenses for the bank. “That’s why we’re being so forceful about reminding people about what we expect [for net interest income],” he said. 

Salient risks, but hoping for the best

While bank earnings could face pressure as they compete for deposits moving forward, there are also other “salient risks in the immediate view,” according to Jamie Dimon in his Friday press release. 

He pointed to several: consumers are spending down their pandemic-era “cash buffers;” core inflation, which excludes more volatile food and energy prices, remains “stubbornly high;” the Ukraine war continues to weigh on the global economy; and the Federal Reserve is shrinking its balance sheet (quantitative tightening) faster than ever before after buying mortgage backed securities and government bonds in order to boost lending and investment in the economy for years.

On the company’s follow-up earnings call, Dimon warned that these economic headwinds remain “substantial” and “somewhat unprecedented.” Still, the CEO has argued throughout 2023 that, despite the risks, consumers and businesses are in a strong position.

“Consumer balance sheets remain healthy,” he reiterated Friday. “Consumers are spending, albeit a little more slowly. Labor markets have softened somewhat, but job growth remains strong.”   

He also had a message for the doomsayers: “I just think people should take a deep breath. We don’t know whether all of that will cause a soft landing, a mild recession, or a hard recession. And, obviously, we should all hope for the best.”