Traditionally, big U.S. banks' earnings have been driven largely by activity on Wall Street, including M&A, bond and stock trading volume, and IPOs. However, this year it's the robust American consumer who has become the key driver of bank profits, and also share prices, at least in the short term. Financial companies that are likely to continue to benefit the most from the trend include Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM), Citigroup Inc. (C) and Wells Fargo Corp. (WFC), as outlined by the Wall Street Journal

Consumer Spending Power

With interest rates low, U.S. consumers are taking advantage of cheaper borrowing costs to buy everything from homes to apparel to dining. In fact, the U.S. Commerce department says spending at restaurants, bars and websites jumped at one of the fastest paces on record in the second quarter. “The consumer in the United States is doing fine,” said JPMorgan CEO Jamie Dimon in a call with analysts. “People like their credit cards. They use their credit cards more than they use their debit cards.” 

High-growth consumer businesses in areas such as credit cards and mortgages boosted quarterly profits at many big banks in the recent period, while revenues from trading and deal fees slumped. In contrast, Goldman Sachs Group Inc. (GS) which has traditionally focused less on consumer operations, was the only major U.S. bank to post falling earnings in the recent quarter. 

Shares of Bank of America have returned 19.4% YTD, JPMorgan is higher 17.1%, and Citigroup is up 37%, compared to a 19.5% gain for the S&P 500 and a 14.1% increase for the KBW Bank Index (BKX) this year. Wells Fargo, hurt by scandals and management missteps, is the only one out of the four down YTD, with a 1.5% decline. Goldman's shares, which have been depressed, are up 28.6% in 2019. 

At JPMorgan, card spending rose 11% to $192.5 billion, and balances increased 8% to $157.6 billion, per the WSJ. At Citigroup, the purchase volume on its roughly 35 million branded credit-card accounts in the U.S. jumped 8%. Card purchases and balances increased 6% at Wells Fargo. Meanwhile, as the average rate for a 30-year fixed-rate mortgage has fallen below 4%, a rush to buy and refinance homes has driven mortgage originations up at JPMorgan, Wells Fargo and Citigroup. 

The upbeat sentiment of the U.S. consumer, supported by low unemployment and rising wages, contrasts with that of institutional investors, who are more concerned about slowing global growth and trade tensions between the U.S. and China. 

This rising caution on Wall Street dragged trading revenue at JPMorgan down 6% YOY, with investment banking profit down 8%. At Goldman, quarterly trading revenue fell 3%, weighed down by a 13% dip in fixed income trading. These weaker businesses led overall quarterly profits at Goldman to fall as revenue plunged from underwriting and debt-trading. 

Looking Ahead

Given that consumers typically spend and borrow more when rates are low, a dovish Fed could be good news for banks that cater to Main Street. These banks' profits would rise even more if the central bank cuts rates further this year and in 2020.