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Bank stocks are positioned for a robust rally, Wells Fargo analyst Mike Mayo wrote in a Thursday note, with the Federal Reserve gearing up for interest-rate reductions and the U.S. economy on track to potentially achieve a soft landing.
As rate cuts loom, likely starting next month, large-cap lenders are projecting improved net interest margins. Lower deposit costs, amid a lower rate environment, are expected to drive higher net interest income – the profit banks make when the interest earned from loans and investments exceeds the interest paid on deposits and other borrowings – bolstering overall profitability.
Historically, Mayo observed, bank stocks have trounced the S&P 500 by an estimated 10% from trough to peak during the three-month period after a first-rate cut.
With inflation having largely receded, bank stocks already have been outpacing the broader stock market, as many investors rotate from growth stocks into those that may benefit from lower rates. From a year ago, the KBW Nasdaq Bank Index (BKX) jumped 40%, outperforming the S&P’s 26% climb.
Still, Mayo’s optimistic view on bank stocks is tempered by the possibility of a brief rally. Should the Fed successfully engineer a soft landing, the advance in bank stocks might only last for three months, he wrote. However, if a recession occurs, the financials sector could underperform the S&P over the coming year.
Jefferies analyst Ken Usdin recently suggested that Fed rate cuts may have a greater negative impact on big banks due to their higher asset sensitivity, unlike the regionals which are more neutral to short-term, policy-sensitive rates.
Bank ETFs: (KBE), (KBWB), (QABA), (FTXO), (KRE), (IAT), (DPST), (KBWR).
