💰 Wall Street’s Toll Booth Trade

THE MAIN EVENT
Wall Street’s Toll Booth Trade 🚦

The big banks just had one of those quarters where almost everything went right.

They didn't get there by picking the winners of the AI boom. They got there by owning the road it drives on and charging for every trip.

J.P. Morgan, Goldman Sachs, Citi, Bank of America, and Morgan Stanley all beat earnings and revenue estimates. J.P. Morgan posted a record $21.2 billion profit, the largest quarterly profit in U.S. banking history.

Goldman and J.P. Morgan also hit a 24% return on equity. Plain English: for every $100 of shareholder money sitting in the business, they were generating $24 of profit per year. For banks, that is very strong.

The revenue growth was not subtle:

• Goldman Sachs: $20.3 billion, +39%

• J.P. Morgan: $58.0 billion, +27%

• Morgan Stanley: $21.3 billion, +27%

• Bank of America: $31.6 billion, +15%

• Citi: $24.8 billion, +14%

Across the group, expenses got more efficient, credit losses stayed tame, and shareholders got billions in buybacks.

So yes, the banks are booming. But this was not just “the economy is great, therefore banks are great.” It was more specific than that: markets are hot, AI has the big funds trading, IPOs are back, and Wall Street gets paid when its clients get busy.

The biggest engine was trading.

If you add up the five banks' filings, the toll booth is doing enormous business. J.P. Morgan, Goldman, Morgan Stanley, Bank of America, and Citi booked $47 billion in trading revenue last quarter, up 38%.

But that 38% is a blend, and it hides the real story. Trading runs on two roads.

One is fixed income: bonds, rates, currencies, commodities. The other is equities, meaning the business of helping clients buy, sell, hedge, and finance stock-market bets. Almost all of the acceleration came from the equity side.

• All five banks, all trading: +38%

• All five banks, equities only: +71%

• J.P. Morgan equities: +86%

• Goldman equities: +72%

The bond desks had a good quarter. The stock desks had a historic one. The AI boom is obviously a huge part of it.

Institutions are chasing AI stocks, hedging them, financing them, trading around them, and piling into IPOs and options tied to the theme. Banks do not need to guess every winner. They just collect tolls from all the traffic.

And traffic is heavy.

• U.S. options volume hit an all-time high of 73 million contracts a day.

• Stock trading also reached a record, averaging 20 billion shares a day.

Jamie Dimon summed up the moment best: “It’s getting close to as good as it gets. We just don’t know how long it’s going to last.”

Of course, the trouble with “as good as it gets” is that it doesn’t get better. Two of these cracks are already showing. Two more are waiting to happen.

1. Banks are still paying up to keep deposits, because customers can earn decent yields elsewhere.

2. Lending margins remain thin, meaning banks are not making huge spreads between what they earn on loans and what they pay for funding.

3. If the AI trade cools, trading, IPOs, and financing activity will likely slow.

4. If the economy weakens, today’s low credit losses could ramp up quickly.

For investors, the takeaway is simple: bank earnings are telling us that confidence is high and risk appetite is alive. Just don’t confuse a Goldilocks quarter with a permanent climate.

MARKET MOOD
PayPal Pops, Sandisk Slumps, & Big Blue Bleeds 🩸

Winners

PayPal ($PYPL) - Market Cap: $50.0B (Week-to-Date: +22.5%)

PayPal spent years as the fintech everyone stopped believing in. Then a rival showed up with a checkbook. Stripe and private-equity firm Advent bid $60.50 a share, valuing PayPal north of $53 billion, a 28% premium. Analysts say the real prize is Venmo, the payment habit PayPal never fully monetized.

Apple ($AAPL) - Market Cap: $4.90T (Week-to-Date: +5.7%)

Two things landed at once for Apple this week. First, iOS 27's beta shipped with a Siri rebuilt on real AI. Second, China approved Apple Intelligence, unlocking the company's biggest growth market. Deepwater's Gene Munster called it proof Apple “finally has the AI chops it's long been missing.” Here's hoping this version of Siri can finally do more than set a timer.

ExxonMobil ($XOM) - Market Cap: $605.0B (Week-to-Date: +5.1%)

Four weeks ago, oil lost its war premium. This week, it came right back. President Trump initially demanded a 20% toll on all cargo crossing the Strait of Hormuz, sending Brent crude surging 9.6% in a single day. He abruptly scrapped the toll in exchange for Gulf state investments, but the headfake was enough to keep Exxon up while the broader market fell.

Losers

Sandisk ($SNDK) – Market Cap: $209.0B (Week-to-Date: -26.3%)

Sandisk, 2025's best-performing S&P 500 stock, plummeted as the AI narrative flipped from shortage to glut. SK Hynix warned that memory price growth would fall short of the 50% analysts expected. Then, China's CXMT lined up a multibillion-dollar IPO to fund even more supply. The collateral damage was immediate: Western Digital, Seagate, and Micron promptly fell 20%, 18%, and 13%, respectively.

IBM ($IBM) – Market Cap: $205.9B (Week-to-Date: -23.8%)

Big Blue just suffered its worst day in company history, worse than Black Monday 1987. IBM pre-announced a quarter that missed expectations, but the reason is what rattled everyone. CEO Arvind Krishna admitted clients froze big mainframe deals because the debut of Mythos, Anthropic's new AI model, has them rethinking their security budgets.

Caterpillar ($CAT) – Market Cap: $404.0B (Week-to-Date: -7.9%)

Believe it or not, Caterpillar is the Dow's best performer this year, up over 50%. Data centers need massive amounts of power, and CAT has a $63 billion backlog worth of heavy-duty generators. So when the AI trade wobbled this week, the bulldozer company wobbled right along with it. Michael Burry is already shorting the stock, calling its valuation a 30-year high. Just another reminder that you might own more AI than you realize.

CHART OF THE WEEK
Markets Snooze Through Buffett’s Alarm 🥱

Warren Buffett called it “probably the best single measure of where valuations stand at any given moment.”

The idea is simple: take the value of the entire US stock market, divide it by the size of the US economy, and you see what investors are paying for each dollar of American output. Buffett warned in 2001 that if this ratio neared 200%, “you are playing with fire.”

Well, the Buffett Indicator just hit a record 234%, more than three standard deviations above its long-term average. The dot-com peak was 143%.

So where is the fire? Well, maybe the yardstick is warped...

1) We're an asset-light economy now. This market is built on highly scalable software, not capital-heavy steel mills. Thanks to that structural shift and the 2017 tax cuts, corporate profit margins are hovering near 12% of GDP. That blows past the historical 7% to 8% norm.

2) Earnings are on steroids. Historically, S&P 500 earnings grew at a reliable 6% to 7% a year. But today? Wall Street consensus expects EPS growth of nearly 22% for 2026 and another 15% in 2027 (shoutout to AI and buybacks).

3) The denominator drifted. Buffett's original metric used GNP, which counts what US firms earn everywhere. Today's version uses GDP, which only counts what happens here. As our tech giants conquer the globe, their valuations reflect more than the domestic economy.

4) The relentless, price-blind bid. Every other Friday, millions of paychecks automatically dump billions into 401(k) index funds at whatever the market price happens to be. Passive investing is now the majority of the equity fund market, establishing a massive, permanent floor under prices.

None of that makes stocks cheap. But it does prove that you can't measure a tech-driven market with an industrial-era thermometer.

FAST FACTS
Savers Fall Short, Senators Step In ✍️

🎯 Savers Want $1.2M, Expect Half That: Workplace-plan participants say they need $1.2 million to retire comfortably, but 51% expect to have under $500,000. [Read]

🏛️ Senators Move On Social Security: Eight senators from both parties introduced a bill to force Congress to act before the retirement fund runs short in 2032. [Read]

👴 Next Year's Raise Looks Like 3.8%: The 2027 Social Security COLA estimate holds at 3.8%, worth roughly $79 a month on the average benefit. [Read]

🏠 Mortgage Rates Hit A 1-Year High: Freddie Mac's 30-year fixed averaged 6.55% this week, the highest since August 2025. [Read]

🚗 The IRS Raised Its Mileage Rate: The standard business rate rose to 76 cents a mile on July 1, its first midyear bump since 2022. [Read]

🏡 Insurance Now Beats Property Taxes: Homeowners in 15 states pay more for home insurance than property tax, with premiums averaging 8.5% of monthly housing costs. [Read]

🤖 Anthropic Eyes An October IPO: The Claude maker was valued at $965 billion in May and would be the first big AI lab to sell shares to the public. [Read]

🫧 Fund Managers Fear An AI Bubble: 45% of managers in BofA's latest survey named an AI bubble the single biggest tail risk facing markets. [Read]

WORDS TO REMEMBER
Volatility Is Part Of Ownership 🧠