US banks sold as rates climb but income outlook rises into 2027: Goldman

Bank stocks sit at the centre of the higher-for-longer rates debate, according to Goldman. Despite better income guidance, unrealised bond losses keep investors away as the Fed continues hiking. If yields stabilise, or if regulatory changes flagged by Goldman make buybacks in 2027 more likely, the mismatch between earnings and share prices could shrink quickly. Deposits are concentating in the largest lenders, adding pressure to funding costs for regional and smaller banks. Goldman's credit team prefers secured, collateral-backed loans over unsecured bonds, a cautious signal given the heavy pipeline of AI-linked bond supply.

An earlier report from S&P stated:

• S&P sees global bond issuance growth slowing to 2.7% in 2027, weakest in five years

According to Goldman, US bank shares are being sold because of what higher rates do to their bond portfolios, rather than what they do to earnings. The firm sees the gap between these two as an opportunity.

Key points from the review:

• Roughly 80% of early-reporting S&P 500 companies topped Q3 earnings forcasts, according to Goldman, yet market responses were subdued. Higher yields redirected attention to margin durability, earnings quality and 2027 guidance.
• US banks posted strong fundamentals: guidance on net interest income stretched to 2027, equity trading jumped, and credit metrics remained healthy.
• Nevertheless, bank stocks declined. Goldman attributes this to investor focus on capital pressures from unrealised bond losses, which the firm sees as mostly a timing matter. Regulatory changes could support buybacks in 2027.
• A number of bank chief executives warned of a once-in-a-generation capital shortfall needed to finance the AI surge, while they rejected third-party agentic AI – autonomous software – that acts on client accounts due to security concerns.
• Goldman's credit team favors secured, amortizing loans backed by collateral and contracts compared to unsecured bonds.
• The ten largest US banks accounted for roughly 85% of Q3 deposit growth; one bank alone took about 30%. Consumer activity and credit conditions stay largely healthy.

According to a third-quarter earnings report from Goldman, US bank shares have been penalized even though third-quarter performance was robust. The view is that investors are focused on a single concept – higher rates trigger selling of financial stocks – and ignoring guidance for rising interest income through 2027.

Overall, corporate outcomes have been durable. According to Goldman, about 80% of the early-reporting S&P 500 companies beat earnings estimates, but stock market reactions to those beats have been quiet. As investors weigh the impact of higher yields, attention has moved from headline quarterly beats to margin resilience, earnings quality and whether forward guidance through 2027 is credible.

Banks, which typically report early, posted solid figures. Goldman noted that net interest income guidance – the difference between earnings from loans and securities versus deposit costs – was extended to 2027 as fixed-rate assets repriced higher. Equity trading revenue surged and credit metrics stayed benign.

Goldman maintains that the market's response reflects the two-sided nature of higher rates. While raising interest income, higher rates also pressure capital through unrealised bond losses; Goldman thinks investor focus is on the capital side. The firm sees the gap between these effects as a potential opportunity, describing capital stress as largely a timing issue and noting that upcoming regulatory changes could support buybacks in 2027. Most banks providing guidance expect interest income and net interest margins to keep growing through 2027.

Artificial intelligence was a key theme in bank comments. Several chief executives warned of a once-in-a-generation capital shortage to fund the AI boom, while rejecting third-party agentic AI – autonomous software agents – from trading on client accounts due to security concerns, even as their internal AI tools scaled up. Goldman's credit team sees a similar divide in the broader AI space: demand remains intact, but access to funding now separates winners from others. The team stays cautious, favoring secured, amortizing loans backed by collateral and contracts over unsecured bonds.

Concentration in the sector is also rising. According to Goldman, the ten largest US banks captured about 85% of Q3 deposit growth, and one bank took roughly 30%, leaving little for the more than 4,200 other institutions.

On consumers, Goldman's consumer sector analyst Cecile Origenes said pressure at lower income levels has not led to broad deterioration. The more important question as earnings season continues, she noted, is where consumers are still willing to spend and which companies can capture that demand without sacrificing margins.