Earnings season is here again, and kicking it off are financial stocks like the commercial and investment banks that most people avoid due to their complex business models. However, as these banking stocks start to report their quarterly figures, investors can get a feel for how the sector is doing and gain insight into how the rest of the economy is doing as a whole.

Last week, banks like Citigroup Inc. (NYSE: C) and J.P. Morgan Chase & Co. (NYSE: JPM) reported their earnings, showing Main Street a common trend. First, net interest income (NII) falls as consumers walk away from today’s high interest rates, hurting demand for products like mortgages and credit cards. Speaking of which, these banks also reported rising delinquencies in their credit card departments.

These trends show a weakening environment for the U.S. consumer, who is now choked by inflation pressures. Still, investors will soon find out how this is more of a lagging indicator rather than a leading one for the economy. Today, Bank of America Co. (NYSE: BAC) is adding to these insights so that investors can consider the changing trends on the corporate side of the banks, which always act as a leading indicator of where the rest of the market may go.

Bank of America's Diverging Businesses: The Ultimate Economic Indicator

Whenever the commercial and corporate sides of the banks start to diverge, it typically signals a pivoting moment for the economy and, in the same way, a pivoting moment for the stock market. Investors can consider the commercial side as the lagging (or present) state of affairs. At the same time, the corporate department (trading and investment banking) is considered to be the leading indicator.

As investors know, banks are all reporting higher charge-offs in credit cards and lower NII due to less commercial activity and consumer confidence. These trends reflect where consumers are today, a worrisome state of worrying about inflation and future prospects.

But, the investment banking side of the business is coming back to life, not only at Citigroup and J.P. Morgan Chase. Bank of America’s $13.7 billion in NII, which fell short of analyst expectations for $13.8 billion, is more than offset by trading and investment banking revenues.

Trading departments brought in $1.9 billion in revenue, an advance of 20% from a year prior. Considering that the volatility index (VIX) is at its lowest level since 2018, the only driver for trading revenue is not in-house trading but client trading, which signals a rising interest in exposure to stocks and fixed-income (bonds) products.

With this in mind, investors can double-check deal-making (mergers and acquisitions) activity, which brought in $1.6 billion, or a 29% jump over the past 12 months. So, what does this divergence really mean?

How Bank of America's Earnings Signal a Bet on Interest Rate Cuts

Typically, the businesses carrying Bank of America’s earnings forward are highly dependent on a lower interest rate environment since flexible financing and cheaper debt are usually the foundation for corporate banking activity.

So, if markets are switching to trading and dealmaking, it is because they fully expect to see interest rate cuts coming in the following quarters. According to the CME’s FedWatch tool, these interest rate cuts could be here as soon as September 2024, with over 90% certainty today.

Other side bets will be made on the revealed sentiment on these interest rate cuts, primarily around bonds and small-cap stocks, otherwise known as growth equity businesses (which are also dependent on low interest rate environments).

Stanley Druckenmiller – the guy who traded shoulder to shoulder with George Soros – already sold out of NVIDIA Co. (NASDAQ: NVDA) and reallocated his profits into the iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT) as well as the iShares Russell 2000 ETF (NYSEARCA: IWM) to make these bets into small caps and bonds.

Why bonds? Prices on treasuries move opposite to interest rates so that rate cuts could – and should – bring investors into a profitable situation if they are caught holding bond positions. More than that, here’s one last take investors can walk away with when looking into Bank of America.

Despite falling NII, the bank’s financials are still strong, so management could afford a $0.96 share dividend payout, translating into an annual dividend yield of 2.2%. While this yield is below inflation, the upside in Bank of America stock offsets this.

Others on Wall Street may want to revisit their price targets on Bank of America stock, especially after today’s results, and adding the technical factor leaning on short interest collapsing by 17.3% over the past month to show another vote of confidence coming from the rest of the stock market.