Bank Stocks Rally That Beat Mighty Tech Now Faces Earnings Test

A rally that has seen European bank stocks outpace both US peers and the Nasdaq over the last three years faces a key test in coming days when most of the region’s major lenders report results.

Optimism over rising earnings and increased capital returns has formed the basis of gains that have extended this year. A 17% rise in the Stoxx 600 Banks Index is the strongest of any sector, taking it to its highest closing level since 2015.

Now, it’s time to deliver. And the omens look positive. The highest interest rates in recent memory have been a boon for profit, while signs that the cost of money will stay higher for longer serve as a further potential catalyst. Dividends and buybacks are a further attraction for investors, as are sector valuations that remain low relative to history and broader markets.

All of that isn’t lost on stock pickers. M&G’s European strategic value funds are running the largest overweight position on European banks since they started 16 years ago, according to fund manager Richard Halle.

“Our anticipation is earnings forecasts are likely to be resilient,” Halle said. The sector is pricing in “quite a few” interest-rate cuts in Europe this year.

earnings still point