Why bank stocks are tumbling even as interest rates climb

Treasury yields and interest-rate expectations in America have marched higher since the middle of December, when the Federal Reserve announced it would accelerate plans to taper its asset purchases. The yield on ten-year Treasuries climbed to 1.9% on January 18th, its highest level in two years. As recently as October investors expected just a solitary interest-rate increase from the Fed in 2022.

Yet, surprisingly, the lenders’ stock prices have tumbled . Shares in JPMorgan have fallen by nearly 12% since the bank reported its earnings. Goldman’s shares dropped by 7% in a single day on January 18th, after it released its earnings. What resolves this seeming paradox? Higher wage costs in part reflect booming business: Goldman’s profits for 2021 as a whole were more than 60% above their previous all-time high. But dearer compensation adds to growing unease about how pervasively inflation has taken root in America. “There is real wage inflation everywhere in the economy,” David Solomon, Goldman’s boss, told investors on the bank’s earnings call.

Easy money also helped fuel a bonanza in company-financing activity. The pace of dealmaking and initial public offerings has been almost bewildering. Globals raised the mammoth sum of $600bn in capital in 2021, compared with around $200bn in 2019. Trading and corporate finance have together generated extraordinary profits for Wall Street firms. Global investment-banking revenues amounted to $129bn in 2021, a 40% increase over those of the year before, according to Dealogic, a data provider.

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