Wall Street's COVID-era golden age is over

Profits for America's biggest banks are shrinking, as "easy money" policies that made the COVID era a boom time on Wall Street come to a close.

What's new: The latest earnings reports.

Monday: Goldman and BofA reported smaller profits than last year.

• Last Friday: Wells Fargo and Citigroup, ditto.
• Last Thursday: JPMorgan and Morgan Stanley, double ditto, plus they both missed analyst expectations.

The big picture: The free-money era on Wall Street — a side effect of the emergency monetary policies the Fed used to keep the pandemic from destroying the economy — has more or less ended over the last few months.

Backstory: Starting in March 2020, the Fed slashed interest rates to near zero and began printing what would ultimately be several trillion dollars and pumping them into financial markets.

• That supercharged Wall Street businesses like running public stock offerings and corporate bond sales, advising and financing big mergers and acquisitions, and operating trading desks.
• Bank share prices surged, too. A year after the stock market bottomed on March 23, 2020, Morgan Stanley was up nearly 200%. Goldman Sachs was up about 150%. Bank of America and Citigroup had doubled. (The S&P 500 was up about 75% over that time.)

The intrigue: Interest rates have surged this year, rapidly changing the conditions in financial markets and slowing down bubbly businesses.

• High rates crushed stock prices and pushed the S&P 500 into a bear market, dissuading companies from selling shares into a down market.
• The business of managing corporate bond offerings has also slumped as interest rates rose. (Companies don't want to borrow at what seem, relatively speaking, like high rates.)

• Higher borrowing costs — which the Fed is using to try to slow the economy, and thus, ease inflation — also raise the risk of recession and the losses on loans that typically occur during downturns. So banks are socking away billions in reserves just in case things get ugly, which hurts their earnings.

Yes, but: It's not all bad on Wall Street.

• Volatile market conditions can be good for bank trading desks that make the right calls. Trading was a bright spot for Goldman Sachs and Citigroup this quarter.
• Higher interest rates also can boost the money banks make by charging interest. (Bank of America did just that, for example.)

The bottom line: The market seems to see tougher times ahead for big banks — much of those stock gains have evaporated this year.