US lenders are on a tear and hedge funds are snapping up shares at a furious pace, underscoring Wall Street’s increasing conviction that their record-breaking rally has more room to run.
Last week, net buying by the fast-money crowd rose to the highest in nearly a decade, data compiled by Goldman Sachs Group Inc.’s prime brokerage show. That optimism, along with heightened expectations for interest-rate cuts that could spur growth and lending, and a Federal Reserve announcement that all of the biggest banks passed its annual stress test, helped a gauge of financial stocks in the S&P 500 Index hit a record on Monday.
Analysts and traders who watch financial stocks are enthusiastic about the industry. At UBS Group AG, their basket of large-cap banks is one of the trading desk’s preferred ways to play the broader stock market run. Wells Fargo & Co.’s star banking analyst Mike Mayo is predicting more gains, as are Bank of America Corp. analysts.
The results of the Fed tests will “serve as a shot in the arm for the group,” BofA analysts led by Ebrahim Poonawala wrote.
It’s the rebound that many investors had been waiting for following President Donald Trump’s November reelection, which many expected to usher in a wave of banking deregulation and pro-business policies. That was before he unleashed a global trade war in April that briefly knocked the industry off course. The KBW Bank Index, a narrower benchmark which tracks the biggest US banks, has jumped more than 30% from its low in April, but remains 5.4% below its 2022 peak.
More Catalysts
There are other catalysts ahead, including expected revisions to banking regulations that would ease capital and leverage requirements.
“That’s the big change potentially coming — if you loosen up the capital amount that has to be carried on the books you make lending more profitable for the banks, and that could induce them to lend more aggressively,” said Gerard Cassidy, head of US bank equity strategy at RBC Capital Markets. The US financial sector is currently his favorite globally.
Cassidy expects changes in the latter half of 2025 that will allow banks to be more aggressive in the way they manage their loan portfolios by the end of the year and into 2026.
Looser Fed policy is also anticipated. While typically higher rates are favorable for banks, expectations for a cut this year would help the economy, potentially boosting banks’ deal business.
Cassidy expects that when the fixed-rate loans that the banks purchased during the ultra-low interest rate era of the pandemic come up for renewal, the lenders will be able to reprice them at favorable rates.
“The banks are capturing more yield on their assets while their funding costs are going down,” Cassidy added.
Earnings on Deck
Of course, not everything is moving in their favor. After nine quarters of earnings expansion, the financial sector is expected to show little to no growth in the current reporting period. JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo are scheduled to report quarterly earnings on July 15, marking the start of the cycle.
Still, options traders are positioning for more stock gains. The call-to-put ratio on the largest financials-focused ETFs, the Financial Select Sector SPDR Fund (XLF), is hovering near a four-month high.
“We see a big interest in banks stocks’ upside, fueled by a deregulation push and low implied volatility in the sector,” said Daniel Kirsch, head of options at Piper Sandler.
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