As Wall Street grapples with a lackluster performance in the stock market, attention is turning to the banking sector for potential revitalization. According to a note from Nicholas Colas, co-founder of DataTrek Research, US bank stocks are currently the market’s Achilles’ heel. This assessment comes on the heels of a regional banking crisis in March that dealt a significant blow to these financial institutions.
Since their nadir in May, bank stocks have made a recovery, albeit one that falls notably short of the broader market. As of Thursday, the S&P Bank Index ETF (KBE) and the S&P Regional Bank Index ETF (KRE) reported year-to-date declines exceeding 20% and 30%, respectively, in stark contrast to the S&P 500’s robust 11% gain over the same period. Moreover, during the recent 5% drop in the S&P 500, both bank indexes experienced a more severe decline, exceeding 7%.
Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, highlighted financials as a “missing ingredient” in the market’s rally since the October 2023 lows. Analyst Gerard Cassidy, who specializes in covering major banks at RBC, emphasized that the trajectory of these firms hinges on the Federal Reserve’s approach to interest rates. Should the Fed opt to cease rate hikes, bank stocks may find themselves stabilizing after witnessing valuations plummet to unprecedented lows over the past few decades. Conversely, an uptick in inflation that necessitates further rate hikes could spell trouble for US bank stocks.
Recent forecasts from the Federal Reserve in September hinted at the likelihood of one final rate hike in 2023 before a potential shift towards rate reductions. Colas, however, admitted to a cautious stance on this bet, cautioning, “If the bears are right and ‘something is going to break’ because of suddenly higher interest rates, then that ‘something’ will almost certainly involve US banks. If higher yields cause a recession, then loan losses will rise. If higher yields hit the value of a bank’s bond portfolio, it may need to raise more capital or sell at a distressed price.”
The forthcoming week is poised to shine a spotlight on the banking sector as earnings season kicks off, with JPMorgan Chase (JPM) slated to announce its third-quarter earnings on Friday, October 13th. It is increasingly evident that the nation’s banking industry wields substantial influence over the trajectory and pace of the stock market’s recovery following its recent downturn.
Source: Yahoo Finance
