Bank Stocks Are Back in Vogue on Stimulus, Interest-Rate Outlook
(Bloomberg) -- Big U.S. banks have gone from losers to leaders in the stock market, rebounding from a pandemic-induced pummeling as investors anticipate a surge in federal spending in 2021 and look ahead to this week’s earnings-season kickoff.
Whether they maintain that momentum depends on the success of President-elect Joe Biden’s agenda, Federal Reserve monetary policy and how quickly Covid-19 is brought to heel. Investors have been optimistic about economic growth, with banks enjoying a bump in interest rates as they increase lending, deal-making and trading. Last month’s reintroduction of bank stock buybacks and Biden’s selection of Janet Yellen as Treasury Secretary in November also helped.
The KBW Bank Index has jumped 8.4% in January, beating the S&P 500 Index’s 1.8% advance. Last year, the bank gauge tumbled 14% while the broader market rose 16%. Three of the nation’s largest lenders -- JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. -- release quarterly earnings on Friday. Bank of America Corp. and Goldman Sachs Group Inc. follow on Jan. 19. Morgan Stanley reports on Jan. 20.
Large and regional bank stocks staged a late-year comeback on vaccine optimism and a rotation into value stocks from growth stocks, Keefe Bruyette & Woods Inc. analyst Christopher McGratty wrote in a note last week. Heading into earnings season, “relative stock performance will be less about the quarter and more about the outlook” for credit, profits and capital management, he said.
Goldman Sachs closed at a record high on Jan. 7. Wells Fargo analyst Mike Mayo had predicted that, after better-than-expected earnings at Jefferies Financial Group reinforced his view that “capital markets should remain stronger for longer and that Goldman’s results should exceed.” On Friday, Goldman’s commodities traders were said to have doubled their revenue in 2020, signaling that Wall Street desks managed to print profits into the year’s finale.
Bank stocks have “moved back into vogue” due to optimism about fiscal stimulus, infrastructure spending, rising interest rates and bigger capital returns, Goldman analyst Richard Ramsden wrote last week. He highlighted stock outperformance since the Fed released its special crisis stress test results in December, which aligned with his view that bank returns should “rebound and recoup” nearly three-quarters of 2020’s decline during the next two years.
Last week, JPMorgan and other banks climbed after a slew of fresh buy ratings on bets more government spending was likely in the wake of Democrats taking control of Congress.
“The best is yet to come,” BofA analyst Erika Najarian wrote, as 2021 is likely to be a strong year for banks, with JPMorgan well positioned to benefit from a “stimulus-aided comeback of the U.S. consumer, the potential return of travel and restaurant spend, and the steepening of the curve.”
“Banks ostensibly have myriad tailwinds going forward,” including higher interest rates, steeper curves, the release of 2020’s massive provisions and the return of buybacks, Vital Knowledge founder Adam Crisafulli said by email. However, he added that further gains in the KBW Bank Index, which has “quietly surged and is now nearly back to where it was before the pandemic broke in February/March,” may be a function of rotation out of tech stocks
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