Sharp rate rise likely caught Wall Street off guard

Wall Street banks are supposed to be masters of the financial universe. But surging interest rates likely hurt several of their key businesses in recent months.

Driving the news: First-quarter earnings season gets underway this week, with JPMorgan Chase starting the festivities this morning. The recent trajectory of bank stock prices suggests investors aren't expecting good news as earnings results roll in over the next week.

How it works: Wall Street makes money — lots of it — by connecting companies to giant pools of capital. They ...

• Make loans.
• Help companies list their stock on exchanges.
• Advise CEOs on M&A.
• Arrange complicated offerings of corporate bonds.
• Package massive pools of consumer borrowings — like mortgages and car loans — into securities.

Between the lines: Rising rates allow banks to charge more on loans. But some of their other businesses get a lot more complicated when rates move up suddenly — as they have over the last couple of months.

• That's because the sharp rise in rates — not to mention the war in Ukraine — has made markets incredibly jittery. (The S&P 500 was down by as much as 12.5% in early March, though it clawed back a lot of ground since.)
• Those jitters becalmed key banking activities. M&A dealmaking dropped. The IPO market was put on ice. Business lending flatlined.

Meanwhile, banks will also likely have to take "mark-to-market" losses on some of the bonds they own (the value of bonds falls as interest rates rise).

What they're saying: Analysts at J.P. Morgan estimate that the commercial banking sector may have suffered roughly $60 billion in mark-to-market losses in the first quarter.

• Fitch Ratings estimates it could be even higher, with as much as $80 billion in losses.

What we're watching: Which banks have heroes on their trading desks — which tend to make money amid choppy market conditions — and are able to offset the drags from higher rates.