Bank Earnings Rollup: Middle Market Lending Faces Headwinds Amid Tariff-Driven Uncertainty

April 21, 2025

Major U.S. banks’ first-quarter earnings for 2025 reveal significant challenges for middle market lending as financial institutions navigate economic headwinds driven largely by President Trump’s recent tariff policies. As bank executives take a more cautious stance, middle market borrowers face a potentially more constrained credit environment.

Bank Earnings Reflect Tariff Concerns

JPMorgan Chase reported strong first-quarter profits of $14.64 billion, or $5.07 per share, exceeding analyst expectations with revenue rising 8% to $46.01 billion, boosted by higher investment banking fees and robust trading results. However, CEO Jamie Dimon struck a cautionary tone, noting that “clients have become more cautious amid an increase in market volatility driven by geopolitical and trade-related tensions” and that “the economy is facing considerable turbulence, including geopolitics.”¹

Bank of America similarly posted better-than-expected first-quarter results with profits of $7.4 billion, or 90 cents per share, as revenue rose 5.9% to $27.51 billion. These gains were fueled by net interest income that increased to $14.6 billion in the quarter, exceeding analyst estimates. However, Bank of America shares have recently sold off on concerns that Trump’s tariff policies could trigger a recession.²

The uncertainty in the business environment is casting a shadow over some investment banking activities, including IPO listings and merger advice, while simultaneously creating a favorable environment for Wall Street trading desks.³

Middle Market Lending Outlook

The January 2025 Senior Loan Officer Opinion Survey from the Federal Reserve indicated that banks reported, on balance, tighter lending standards for commercial and industrial (C&I) loans to firms of all sizes in the fourth quarter of 2024. Meanwhile, banks reported stronger demand for C&I loans to large and middle-market firms, while demand for C&I loans to small firms remained basically unchanged.⁴

Among banks that reported tightening standards or terms on C&I loans, a significant reason cited was “a less favorable or more uncertain economic outlook.” In contrast, banks that reported easing standards or terms cited “more aggressive competition from other lenders and a more favorable or less uncertain economic outlook” as primary factors.⁴

Looking ahead, banks reported expecting stronger demand for C&I loans to firms of all sizes over 2025, with many citing “an expected decline in interest rates and expected higher spending or investment needs due to more favorable or less uncertain income prospects” as important factors.⁴

Private Credit Competition Intensifies

Traditional banks are facing increasing competition from the private credit market. According to Morgan Stanley, private credit expanded to approximately $1.5 trillion at the start of 2024, up from $1 trillion in 2020, and is estimated to grow to $2.6 trillion by 2029. Amid tighter bank lending conditions, borrowers have continued to value the speed, certainty, and flexibility of private credit solutions.⁵

The sponsored middle market loan activity has remained relatively resilient, partly supported by demand for incremental or add-on financings. While increasing financing costs have put pressure on some borrowers in older deals, overall credit quality has been consistent over the past year.⁵

Private equity dry powder is forecast to have reached a record high of $1.6 trillion by the end of 2024, which could potentially fuel middle market deals as firms focus on deploying capital and returning funds to founders.⁵

Capital Markets and Investment Banking

Capital markets activities at major banks are showing mixed signals. U.S. banks’ recent earnings show capital markets revenues mounting a comeback, thanks to a renewed M&A pipeline, greater demand for capital from companies and private equity sponsors, and elevated trading volumes. These income streams may strengthen further in 2025 if market activity increases.⁶

However, Bank of America recorded investment banking fees of $1.5 billion in the most recent quarter, down from $1.7 billion in the previous quarter and down 3% year-over-year amid market uncertainty.²

Goldman Sachs had expressed optimism in January about the outlook for 2025, stating in its fourth-quarter earnings call that it was “optimistic on the outlook for 2025 and expects a further pickup in M&A and IPO activity.” The current question is whether Goldman Sachs and other big banks will change their tone given recent market uncertainty or if they believe there’s still a chance for revival in these important categories if the market and economy can overcome current challenges.⁷

Economic Concerns and Market Volatility

The recent implementation of tariffs on key imported goods, particularly in manufacturing, technology, and consumer sectors, has increased input costs for businesses. This development has potentially negative implications for corporate profitability and may reduce middle market firms’ capacity for expansion and new borrowing.⁸

Stock Yards Bank & Trust notes that despite Federal Reserve commentary suggesting financial conditions are restrictive, both bank lending and credit markets appear fairly accommodative. Their analysis shows that about as many banks are loosening their lending standards as are tightening them, and corporate credit markets remain sanguine on the prospects for the economy.⁹

However, the volatile economic environment has led to an increase in market uncertainty. According to the Federal Reserve Bank of Atlanta’s GDPNow model, first-quarter 2025 GDP growth may be significantly lower than previously expected, indicating weakening consumer demand and cautious corporate spending.⁸

Outlook for the Remainder of 2025

As banks navigate this uncertain landscape, several factors will influence middle market lending for the remainder of 2025:

Trade Policy Impact: Ongoing tariff implementation and potential retaliatory measures from trading partners will continue to create market volatility and may influence lending decisions, particularly for middle market companies with global supply chains or export activities.
Federal Reserve Actions: While earlier projections suggested multiple rate cuts in 2025, the Fed’s current stance may shift if tariff-driven inflation persists, potentially keeping borrowing costs elevated for middle market borrowers.
Credit Quality Concerns: Major banks are closely monitoring potential credit deterioration, particularly in sectors most affected by trade policy changes and economic uncertainty.
Private Credit Alternatives: As traditional bank lending potentially becomes more constrained, middle market firms may increasingly look to private credit providers for financing solutions.

Banking industry analysts predict that the current economic uncertainty may persist at least through the second quarter, with potential stabilization later in the year if trade policy concerns are resolved and inflation continues to moderate.

Conclusion

The first-quarter bank earnings reports reveal a financial sector navigating significant economic crosscurrents, with implications for middle market lending. While major banks have generally posted strong results, the cautionary tone from executives and tightening lending standards signal potential challenges ahead for middle market borrowers.

The combination of tariff policies, market volatility, and rising competition from private credit providers creates a complex environment that will require middle market companies to carefully assess their financing strategies throughout 2025. Those firms with strong balance sheets and diverse financing relationships will be best positioned to weather the current uncertainty.

Footnotes