Bank stocks have had a rough year. Lately they are showing signs of life.
Since the end of June, five of the six largest US banks have outperformed the S&P 500’s 13% gain. Shares of Morgan Stanley and Goldman Sachs are up 20% and 19%, respectively. Wells Fargo is up 18%, while Citigroup and Bank of America each gained 17%.
JPMorgan shares are up about 9% so far in the third quarter.
Bank stocks sold off sharply in the first half of 2022 after two years of significant gains, pushed lower by a number of factors. Russia’s war in Ukraine upended commodity markets. Investors worried that the Federal Reserve’s anti-inflation rate hike campaign would push the US into recession.
Corporate bosses, jittery about the uncertainty, moved to the sidelines, drying up the trading boom that powered banks throughout the pandemic.
Now, some analysts say, much of the bad news has sunk in, both for the banks and the broader market. Stocks are up across the board since June.
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The rally could reverse if the Fed is unsuccessful in reducing inflation, said Steven Chubak, an analyst at Wolfe Research. “Most people don’t think we’re out of the woods yet,” he said. “We’re in this kind of purgatory state.”
Bank stocks tend to rise and fall with expectations for the economy, and the rally has coincided with some signs that the economy is improving. US employers continued to add jobs in July, inflation eased and gas prices have been falling. As a result, consumer sentiment has improved over the past two months, after hitting an all-time low in June.
“It looks like inflation is coming down, but will it settle at a high level? If that’s the case, the risk is greater that we’ll have more shocks,” said Christopher McGratty, analyst at Stifel KBW unit.
Major credit card issuers are spending heavily on marketing and trying to increase total card balances, a strategy that suggests they believe consumer spending will remain strong.
And even in a severe recession, bank stocks have room to perform, said Citigroup analyst Keith Horowitz. The Fed’s stress tests found in June that the biggest US banks could continue to lend to businesses and households in a bad crisis.
Still, investors continue to grapple with concerns about a global slowdown. The US economy has contracted for two consecutive quarters, a common definition of a recession. High gas, grocery and rent prices have squeezed US households.
Repeated rate hikes by the Fed have slowed down the housing market. Meanwhile, the surge in pandemic-era deals has not reappeared. All major banks reported a decline in second-quarter profits of at least 27% from a year earlier.
The big six banks are all in the red for the year, some worse than the overall market slump. The worst performer, JPMorgan, is down 23% for the year. The top performer, Wells Fargo, is down 4%.
Write to Charley Grant at firstname.lastname@example.org
This article was published by Dow Jones Newswires, another title of the Dow Jones Group