Large Cap Banks 3Q26 Preview: Higher Rates, Trading Revs Benefit Offset Lower IB Near Term; Medium Term Economy/Inflation Concern

J.P. Morgan's Large Cap Banks 3Q26 Preview notes large bank stocks are down sharply by about 15% from their 52-week highs, primarily due to concerns about the economy with continued high inflation, and also some weakness from concerns about AI tools' impact on deposits and deposit costs. Bond markets have sold off and a large recent debt issuance has performed poorly. Near term, banks should benefit from higher rates, which are positive for net interest income for most banks because of asset sensitivity, plus a large pick-up in September trading volumes. However, higher rates put pressure on capital ratios and share buybacks due to increased net securities losses. Medium term, the key issue is the implications for the economy and markets from high inflation and higher rates, with low income consumers already squeezed and the middle income group the key watch point. J.P. Morgan prefers larger banks given their greater share of trading revenues and asset sensitivity, favoring Citigroup,