Banks Warn Of Market Bubble

Wall Street’s largest banks have posted their strongest results in years, lifted by a resurgence in dealmaking and a revival of trading activity, even as their leaders warned that investor optimism is beginning to stretch valuations across financial markets.

JPMorgan Chase, Goldman Sachs and Citigroup all reported bumper quarterly profits that exceeded analyst forecasts, helped by buoyant capital markets, higher client activity and the loosening policy environment under the Trump administration. Yet behind the record earnings, executives cautioned that parts of the market are showing signs of speculative excess.

Wall Street’s profits return

JPMorgan’s net income rose 12 per cent from a year earlier to $14.3 billion, while Goldman Sachs reported a 37 per centincrease to $4.1 billion. Citigroup’s profits climbed 18 per cent to $3.5 billion, according to company filings.

Revenues from investment banking and trading rose by at least 12 per cent at each of the three lenders, confirming that Wall Street’s long-awaited rebound is under way. Analysts said the administration’s pro-business stance, easing regulation and a more stable interest-rate outlook had begun to revive boardroom confidence after two subdued years.

Goldman Sachs, whose earnings are most exposed to capital-market activity, saw investment-banking fees jump 42 per cent. The bank said its backlog of announced and pending deals ended the quarter at its highest level since 2022, with strong pipelines in technology, energy and financial services.

At JPMorgan, chief financial officer Jeremy Barnum told investors it had been the “busiest summer for mergers and acquisitions in years”, with renewed momentum likely to carry through the final quarter. Citigroup also reported healthy trading volumes and a recovery in its advisory business.

Executives urge caution

Despite the upbeat tone, the chief executives of all three banks used their results to warn that financial markets are showing increasing signs of excess.

JPMorgan boss Jamie Dimon said: “We have a lot of assets out there that look like they are entering bubble territory. That does not mean they do not have further to run, but it is one more cause for concern.”

Goldman’s David Solomon said clients had largely adapted to the political and trade landscape but that valuations in some sectors appeared “detached from underlying fundamentals”.

Citigroup’s chief executive Jane Fraser said the global economy had proved more resilient than expected, describing America’s economic engine as “still humming”, but she cautioned that “pockets of valuation frothiness” were emerging and urged investors to maintain discipline.

Their comments follow a powerful rally in US equities and corporate bonds, driven by optimism that lower rates and deregulation will sustain earnings growth. The S&P 500 has gained more than 20 per cent this year, while private-market fundraising has accelerated sharply.

Signs of credit stress

While loan books remain in good shape, JPMorgan acknowledged a small uptick in credit stress. The share of loans classified as unrecoverable rose to its highest since before the pandemic, though still well within historical norms.

The bank also disclosed a $170 million loss tied to the collapse of subprime auto lender Tricolor Holdings, which Dimon described as “not our finest moment”. The write-down, while modest in the context of JPMorgan’s size, renewed attention on the health of US consumer credit and the risk of further defaults in lower-income segments.

“It is easy to imagine a world where the labour market deteriorates from here,” Barnum told analysts. “We are not predicting a major downturn, but the fact that things are fine now does not mean they will stay that way forever.”

Citigroup and Goldman reported no similar impairments but said they were watching for signs of strain in commercial property and consumer loans. Both banks emphasised that capital and liquidity levels remain strong, and that they are prepared for a slower growth environment if inflation or tariffs weigh on confidence.

Dealmaking revival gathers pace

The rebound in investment-banking income reflects a rush of activity after two years of caution. Many companies that had delayed acquisitions or stock offerings amid uncertainty over tariffs and rates are now pressing ahead with strategic deals.

M&A advisory, debt underwriting and equity issuance all improved markedly during the quarter. In particular, the technology and energy sectors have seen a resurgence in large transactions, including cross-border deals encouraged by the administration’s trade incentives.

Analysts said the renewed appetite for corporate activity supports Wall Street’s recovery but also risks fuelling excessive valuations if competition among acquirers intensifies.

“The rebound in dealmaking is real, but it comes with exuberance,” said one senior New York-based banker. “We are seeing aggressive pricing and generous financing terms returning to the market, which can quickly shift if rates move or sentiment turns.”

Trading and capital-markets gains

Volatility across currencies, commodities and fixed income also boosted trading income. Goldman and Citi both reported double-digit growth in markets revenue, benefiting from active client positioning around tariffs and interest-rate expectations.

JPMorgan’s diversified model again proved advantageous, combining steady consumer and commercial banking profits with elevated trading performance. The bank remains the largest in the United States by assets and deposits, and continues to grow market share in investment banking.

Market response and investor outlook

Investors welcomed the strong results but reacted cautiously to warnings of overheating. Shares in Goldman Sachs and Citigroup rose modestly, while JPMorgan’s stock slipped slightly amid profit-taking. Analysts noted that valuations for bank shares have already rebounded strongly this year, leaving limited short-term upside.

Still, most research houses maintained positive recommendations. Analysts at Morgan Stanley said the quarter “validated the strength of the US banking franchise”, while Jefferies described the results as “a clear inflection point” for dealmaking activity.

Market strategists said the sector is entering a new phase, characterised by moderate loan growth, steady trading income and expanding fee revenues. The biggest risk, they noted, is that asset prices continue to detach from fundamentals, setting up a correction later in 2026.

A cautious return to optimism

For now, the tone on Wall Street remains cautiously optimistic. The Trump administration’s policy stance, which has favoured deregulation and business incentives, has restored confidence among corporate clients and investors. Interest rates are expected to stay below 4 per cent through next year, supporting credit creation and capital-market issuance.

However, executives insist that prudence is essential. “It has been a good quarter, but this is not the time for complacency,” Fraser told investors. “History shows that periods of sustained optimism often sow the seeds of later instability.”

With deal pipelines full, trading desks active and credit still benign, America’s biggest banks are heading into 2026 with renewed momentum. But their warnings are clear: bubbles are easier to inflate than to deflate. The challenge now will be to keep profits high without letting exuberance take hold.