Wall Street banks and smaller competitors remain attractive investment opportunities as financial institutions are set to report earnings this week, according to analysts at BofA Securities and KBW.
"Our conversations indicate a long bias toward bank stocks that have emerged as an island of stability in a financials sector where stocks have been rocked by fears due to (artificial intelligence) disruption risks, and the adoption of digital assets," Ebrahim Poonawala, head of North American banks research at BofA, said in a note to clients.
Long-only investors and portfolio managers are looking for proof that earnings momentum will continue into 2027, he said. That would make the group a "reliable play" as investors move away from chip stocks, Poonawala said.
Bank stocks so far this year have performed better than the broader market. The KBW Nasdaq Bank Index is up about 14% so far this year, compared with a 10% gain in the S&P 500 Index.
"While this has pushed relative multiples higher, relative valuations remain well-below long-term averages," KBW banking analyst Christopher McGratty said in a July 8 note to clients.
Banking giants JPMorgan Chase (JPM), Bank of America (BAC), Goldman Sachs (GS), Wells Fargo (WFC) and Citigroup (C) are expected to release quarterly results before markets open in the US on Tuesday. Morgan Stanley (MS) reports Wednesday, followed by US Bancorp (USB) on Thursday.
BofA's Poonawala said a key question for bank profitability is how firms are performing on net interest income -- the difference between the money a bank generates from interest-bearing assets such as loans and securities and the interest it pays out to depositors and lenders.
"Investors appear increasingly willing to tolerate modest margin pressure if banks can deliver improving NII," he said. "The key debate is whether management teams can offset deposit competition with asset repricing, loan growth, fee growth and operating leverage."
Poonawala's favorite names in the banking sector are Citi, Morgan Stanley, State Street (STT), PNC Financial Services (PNC), Huntington Bancshares (HBAN) and US Bancorp. He categorized M&T Bank (MTB), Regions Financial (RF) and Fifth Third Bancorp (FITB) as "crowded relative shorts," according to the note.
Investors are looking for JPMorgan, the largest US bank by assets, to guide on net interest income and trends in capital markets, he said.
If JPMorgan raises its NII guidance excluding markets and says there's no incremental increase in its expense outlook, it "could trigger sustained stock outperformance," Poonawala said.
KBW said it is sticking with its view that so-called universal banks -- Wells Fargo, Citi, Morgan Stanley, Bank of America, JPMorgan and Goldman Sachs -- will continue to benefit from "multi-year structural tailwinds for capital markets and capital return."
Stocks that KBW recommends investors hold overweight positions in include Morgan Stanley, PNC, Popular (BPOP), Flagstar Bank (FLG) and Hancock Whitney (HWC).
KBW no longer expects the Federal Reserve to cut interest rates this year and believes the year will end with a Fed funds rate of 3.75%. The yield on the 10-year Treasury bond is expected to be 4.4% through the end of 2027, up from a previous estimate of 4.2%, KBW said. Gross-domestic product growth should come in at 2.1% this year and 2% next year, with unemployment between 4.3% and 4.5%, KBW predicted.
"A higher-for-longer interest rate outlook is firmly entrenched in market expectations," McGratty said in his research note.
Another buoyant factor for banks was IPO volumes and mergers and acquisitions, he said.
"Investment banking results for (the second quarter) are expected to be strong with pockets of M&A advisory fees expected to aid top-line results, though equity underwriting is expected to be the story of (the quarter), with the bulge brackets set to benefit the most following elevated issuance from mega-deals pricing during the quarter," McGratty said.
Deals in the quarter included SpaceX's (SPCX) record IPO in June.
Matthew Leising
