Fixed income stalls and stocks take the crown! Wall Street’s big banks report an epic “song of ice and fire” season, marking the darkest hour for a generation of bond traders

According to Zhihui Finance APP, as Wall Street's fixed income divisions faced pressure in the third quarter, their equities counterparts seized this rare opportunity, outshining their peers in the fixed income sector.

The equities divisions of America's five largest banks are expected to generate over $66 billion in revenue in the first nine months of this year, surpassing the anticipated revenue from the bonds, foreign exchange, and commodities businesses by about $3 billion. This growth is partly attributed to the prime brokerage business, which serves hedge funds and large equity investors.

This marks the first time in a generation that bond traders are seeing their annual performance overtaken by colleagues in equities. Not only will this shuffle departmental rankings and bonus allocations, but it also challenges a long-held belief — that computers would take over equities trading, eroding fees and revenues.

"Not long ago, there were concerns about electronification and issues in equities trading," Goldman Sachs (GS.US) CEO David Solomon told analysts. "But today, looking at our equities revenue and the ways we’ve adapted, the opportunities ahead of us are much greater than anyone could have imagined."

The nine-month statistics above are based on Tuesday’s earnings reports from three of the industry’s biggest banks, along with analyst estimates for the other two major peers (whose results will be reported on Wednesday).

So far this year, Goldman Sachs’ equities trading division has delivered two of its best-ever quarterly performances. At JPMorgan (JPM.US), the equities trading business posted its best third quarter on record, with revenue up 49% year-on-year.

Wall Street's fixed income trading units are grappling with the impact of rising interest rates, which can depress the value of existing bonds and dampen clients’ trading appetite. In September, the Federal Reserve raised benchmark rates to curb inflation, and earlier this month the 10-year Treasury yield approached its highest level in nearly 25 years.

While higher rates are affecting trading businesses, they have conversely benefitted banks’ traditional lending. In the third quarter, JPMorgan, Citigroup (C.US), and Wells Fargo (WFC.US) all hit new records for lending revenue, as borrowing demand remained strong despite higher rates.

Within fixed income, results from rates and spread products have weakened, while foreign exchange and commodities have shown greater resilience. Among major banks reporting results Tuesday, only Citigroup's fixed income trading revenues did not decline. The company's profits were further boosted by a strong performance in its services business, which helps companies and governments move and manage money.

Since the start of Tuesday’s earnings season, most major U.S. banks have seen their stock prices fall. Bank of America (BAC.US) and Morgan Stanley (MS.US) are among those set to report quarterly results on Wednesday.

A team led by Truist Financial analyst Brian Foran wrote in a client note that, so far, conditions in market-related businesses have been a distinct mixed bag.

Analysts also noted that in the more traditional lending business, "one view sees solid net interest income prospects, strong returns, and stable capital and consumer spending."