Decoding Bank ETF Prospects Ahead of Q3 Earnings Releases

The U.S. stock market is at a pivotal crossroads. On one hand, uncertainty from the ongoing government shutdown and rising fears of a recession and market correction are worrying investors. On the other hand, AI-driven growth is pushing major indices like the S&P 500 to record highs. Against this tense backdrop, the financial sector is poised to take the center stage with a cohort of major banking giants set to release their third-quarter numbers next week.

These numbers are more than just a report card for individual banks; they serve as a crucial real-time health check on the U.S. economy and dictate the near-term trajectory of Bank exchange-traded funds (ETFs).

The Q3 Lens: Loan Demand, Asset Quality & More

With the upcoming quarterly releases from a handful of mega bank stocks next week, let us dig deeper into the core fundamentals of the banking sector. The same factors, interest rates and economic anxieties, that shape the market mood are the very forces that dictate the twin pillars of bank profitability, namely loan demand and asset quality.

Notably, the latest assets and liabilities report published by the Federal Reserve reflects a smooth acceleration in loan growth during the majority of third-quarter 2025, with the "Loans and Leases in bank credit" category having surged at an annual rate of 5.2% in August and 6.1% in July.

In particular, the Commercial and Industrial (“C&I”) loan segment delivered a significant growth trend. Notably, C&I loans surged at an annual rate of 13.3% in July alone, surpassing the 5.5% growth witnessed in the second quarter, before moderating to a still-strong 4.5% in August.

On the other hand, asset quality remains a section to be approached with caution. While the overall market consensus expects a moderate stabilization, investors remain wary about sensitive areas like consumer loans and commercial real estate. Investors will be looking for any rise in net charge-offs and, critically, whether banks are adding more capital to their loan loss provisions — a clear signal that they are bracing for potential defaults in the coming quarters.

Moreover, a notable rebound in investment banking spiked merger and acquisition (M&A) activities during the third quarter, which is expected to significantly boost the profitability of major banks (strongly anticipated by Reuters). Also, acceleration in capital markets activity, backed by increased initial public offerings (IPOs) and debt issuance, should serve as a major growth catalyst for these banking companies.

Meanwhile, the reduction in interest rate by the Federal Reserve in September can be expected to weigh on the net interest margin earned by major banks. However, if they have effectively managed their deposit costs while maintaining lending yields, the overall impact on their margin might not have been that detrimental.

Expected Earnings Scenario

Let’s delve deeper into the likely earnings picture of the big six banking companies that could drive the performance of the Finance sector ahead, with its total third-quarter earnings expected to surge 10.7% on 6.1% higher revenues, per our Earnings Trend Report issued on Oct. 8, 2025.

The big six bankers that are set to report next week are:

JPMorgan Chase & Co. (JPM) is expected to report $4.83 per share in earnings on $44.86 billion in revenues, suggesting year-over-year growth of 10.5% and 5.2%, respectively.

Citigroup Inc. (C) is expected to report $1.91 per share in earnings on $21.01 billion in revenues, implying year-over-year growth of 26.5% and 3.4%, respectively.

The Goldman Sachs Group (GS) is likely to report $10.93 per share in earnings on $13.99 billion in revenues, suggesting year-over-year growth of 30.1% and 10.2%, respectively.

Wells Fargo & Company (WFC) is expected to report $1.54 per share in earnings on $21.17 billion in revenues, implying year-over-year growth of 1.3% and 4%, respectively.

Bank of America (BAC) is anticipated to post 94 cents per share in earnings on $27.12 billion in revenues, suggesting year-over-year growth of 16.1% and 7%, respectively.

Morgan Stanley (MS) is expected to report $2.07 per share in earnings on $16.25 billion in revenues, implying year-over-year growth of 10.1% and 5.6%, respectively.

Bottom Line

The banking sector's health appears moderately sound, though it faces some pain points, such as pressure on interest margins and asset quality concerns. However, with the recent rebound in lending and investment banking, which is a clear positive, we can expect an overall stabilized growth trend to be reflected by major Financial ETFs, which offer heavy exposure to the aforementioned six mega banks. These ETFs include Financial Select Sector SPDR ETF (XLF), Invesco KBW Bank ETF (KBWB), iShares US Financials ETF (IYF), Vanguard Financials ETF (VFH) and iShares U.S. Financial Services ETF (IYG).

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This article originally published on Zacks Investment Research (zacks.com).

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