A Pulse Check on the K Shaped Economy: Bank Earnings
Q1 2026 Earnings Season is Underway, What Are Financials Telling Us?
Introduction
Everyone that I come in contact with be it my father-in-law, or investment professionals talks about the “K-Shaped” economy. The question on the mind of many is what is the true health of the consumer? There is a feeling out there that unaffordability and inflationary pressures threaten to tip the economy into recession. The problem with the notion that consumers suffering means a recession is coming implies that the market is representative of the citizenry and the economic demographics itself.
The stock market has become decoupled from the economy and that is why GDP growth or declines is not what actually determines the recessionary standard - everything is tied to the price of stocks. It used to be that if the economy slowed and GDP contracted, that recession would trickle down to financial assets and we would have a correction. To show just how decoupled the economy is from the stock market itself lets look at 2022. In 2022 GDP growth exploded and stocks had one of their worst single years on record.
GDP growth or contraction is no longer a KPI for decision makers and if we are honest, the growth in GDP really is unattractive to many policy makers. With all this said, for those who still believe it is important to understand the consumer there are a few industries we will be watching this year. The first are banks/financials, followed by the home builders and consumer staples type businesses.
In this piece, we will explore the financial industry results, talk a bit about valuations and performance and what banks are telling us in Q1 2026 thus far. Banks are truly a read through to the entire economy and these large investment banks are not just tied to the everyday “Mainstreeter” through credit cards and personal lending but they also tell us about business activity through IPOs, M&A, and other asset management trends.
The big story around banking is what will come of the regulatory environment? Post the GFC Basell III & Dodd-Frank required the banking industry to significantly tighten lending standards and capital requirements and it appears the current administration has an interest in cutting this red tape.
The current proposal focuses on the Basell III language and in aggregate would decrease CET1 requirements for Cat 1 & 2 banks by roughly 5%. The regulation is cut on Regional, Super Regional and Community banks as well. The discussion of if this is a good idea or not has already been had, and it appears to be coming. This is obviously a huge change and on top of that, tax cuts and large amounts of home equity pave the way for huge potential consumer stimulus in the coming years.
JP Morgan
