By David Benoit

Among 2020's many oddities, add this paradox: The stock market is crushing the banks, even as the banks are crushing it in the market.

After warning that their trading revenues would fall steeply from the second quarter, several top banking executives recently said that the third quarter wasn't as bad as they had feared. Clients remained active through the normally dull July and August, and September delivered a fresh bout of market volatility.

"We're not going to have as good a quarter as we did in the second quarter," Morgan Stanley Chief Financial Officer Jonathan Pruzan said at the Barclays Global Financial Services Conference last week. "But I would say it's sort of better than a typical summer quarter."

Add a better-than-average summer to a strong first half, and banks' trading floors are chasing their best performance in a decade.

Their own stocks, however, are being slammed. The KBW Nasdaq Bank Index is down 38% this year, while the S&P 500 is up slightly. If that gap were to persist, it would be the banks' worst full-year underperformance in at least 84 years, according to Barclays analyst Jason Goldberg.

Investors have good reason to be concerned. The coronavirus recession has taken a toll on banks' bread-and-butter lending businesses. Near-zero interest rates and the tens of billions of dollars they have set aside to cover bad loans have cut into profits, outweighing the trading gains.

Banks in the S&P 500 are still expected to post a median 38% decline in third-quarter earnings per share, worse than the broader index, according to FactSet estimates. Financial companies focused more directly on capital markets are pegged for a smaller, 11% decline.

Still, after the Barclays conference last week, Mr. Goldberg suggested the selloff is overdone and lifted his earnings estimates for most of the banks. "We heard more good than bad," he wrote in a research note.

Investment banking is another bright spot. Banks have done brisk business helping companies raise cash to ride out the downturn, earning fees advising clients on stock and bond sales and, later, trading those securities.

Another strong quarter in trading and investment banking would bolster the argument that the big banks are in better shape than investors think.

At the Barclays conference, JPMorgan Chase & Co. CFO Jennifer Piepszak estimated total trading revenue would be up 20% in the third quarter from a year earlier.

That is far better than expected. KBW analysts had forecast JPMorgan's trading revenue would fall 17% from the prior year. And while a 20% gain would mark a 37% drop from the second quarter's strong showing, it is less than the possible 50% decline Chief Executive Officer James Dimon suggested in July.

Bank of America Corp. CEO Brian Moynihan said he expected trading revenue to be up between 5% and 10% from last year. Citigroup Inc. CFO Mark Mason predicted gains in the low double digits.

JPMorgan and Bank of America shares are both down more than 30% this year, while Citigroup has fallen 48%.

Across the industry, first-half fixed-income revenue was at its highest level since 2012, according to data tracker Coalition. If the executives are correct regarding the third quarter, the industry will likely have already surpassed total fixed-income revenue from the past three years.

The gains have been more muted for banks' stock traders, but they are still pacing ahead of 2019.

Meanwhile, the third component of investment-banking revenue -- fees from advising and underwriting work -- hit a record in the first half. Executives said they continued to grow in the third quarter. JPMorgan predicted a roughly 5% gain on what had been a record quarter a year earlier for those fees, and Bank of America predicted between 3% and 5%.

Issuance activity remained strong in the current quarter, including some notable initial public offerings. And while the recession has clouded the outlook for mergers, there are signs that deal making could be picking up.

At the Barclays conference, Goldman Sachs Group Inc. CEO David Solomon said his bank is seeing more big deals. Mr. Solomon also pointed to the boom in special-purpose acquisition companies raising funds to take companies public. Goldman played a role in this week's record-breaking $16.1 billion agreement to sell United Wholesale Mortgage to a SPAC.

Write to David Benoit at david.benoit@wsj.com