Banks are kicking off the third-quarter earnings season against a solid fundamental backdrop but with a higher bar to clear with investors, as questions mount over whether the industry can sustain its growth.

The outlook remains constructive, analysts said, supported by healthy commercial activity and loan demand, resilient credit quality and continued strength in fee-generating businesses. But rising interest rates and intensifying competition for loans and deposits could make growth harder to sustain.

"While we are certainly sensitive to market jitters, we do not see the environment deteriorating broadly," TD Cowen analysts said. "Rather, we simply wonder how much better it can get."

Higher rates create a mixed backdrop for banks, potentially boosting income on floating-rate assets while increasing funding costs and putting pressure on net interest margins and loan demand. Elevated oil prices add another layer of uncertainty, with potential implications for inflation, consumer spending and economic growth.

Against this backdrop, Raymond James analysts expect third-quarter results to be relatively solid. But the bigger question for investors, they said, is whether banks can demonstrate durable and profitable earnings growth.

"In particular, we expect investor focus to remain on early reads on 2027 outlooks," Raymond James analysts said, particularly around loan growth, deposit and funding trends, net interest income and margins, credit quality and expense discipline.

The heightened scrutiny comes after a sharp pullback in bank stocks, despite stronger-than-expected second-quarter results. The KBW Nasdaq Bank Index, which tracks 24 publicly traded U.S. banking stocks, fell 12.4% from Aug. 14 to Sept. 30, compared with a 1.7% decline for the S&P 500, according to Raymond James.

The selloff suggests investors are becoming less willing to reward banks for strong near-term results alone, with attention shifting toward whether earnings growth can continue into next year.

Investors are particularly focused on whether net interest margins can continue expanding and earning-asset growth can remain strong, Raymond James said. Still, the firm cautioned that concerns about peak margins may be premature, citing opportunities for banks to benefit from repricing existing loans and securities, and shifting their balance-sheet mix.

Beyond lending and margins, investors will be watching how banks use their capital to sustain returns, particularly as a more favorable regulatory environment gives some institutions greater flexibility.

Options include share repurchases, dividends and acquisitions. JPMorgan analysts, citing discussions with investment bankers, said the backdrop for bank mergers remains conducive, with institutions pursuing scale, lower operating costs, new markets and deposits. Higher rates are not expected to derail dealmaking, they added.

JPMorgan Chase is set to be among the first wave of banks to report earnings, scheduled for before Tuesday's opening bell, alongside Wells Fargo, Goldman Sachs and Citigroup.

Bank of America and Morgan Stanley are scheduled to follow on Wednesday. PNC Financial Services Group and Citizens Financial Group will be among those closing out the week on Thursday and Friday, respectively.