U.S. bank stocks could be poised to deliver solid early-year gains, according to data from Bank of America, as investors await key updates from the country’s biggest lenders.
JPMorgan Chase (JPM)  will kick off the fourth quarter earnings season next week, with updates from rivals Citigroup (C)  and Wells Fargo (WFC)  to follow. This comes as the market enters what is expected to be a renewed surge in dealmaking and new listings under looser regulations from President-elect Donald Trump’s new administration.
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Bank of America analysts suggest the planned departure of Michael Barr, the Federal Reserve’s vice president of supervision, late next month could be the “opening act.”Â
“We remain bullish on bank stocks and expect the group to build on 2024 gains and outperform the S&P 500,” said Bank of America strategists led by Ebrahim Poonawala. “2025 guides starting next week should validate optimism around rebounding customer activity. Headlines tied to regulatory changes (once Trump appointees take charge) could kick in as a positive catalyst.”
The bullish expectation, however, hasn’t entirely been reflected in investor positioning, Bank of America noted in a recent message to clients. It hinted that hedge fund buying could signal near-term gains into and past the earnings season.
The B of A report cited data showing that so-called “long-only” funds added to financial stocks during the autumn run-up.
The benchmark Financial Select Sector SPDR Fund ETFÂ (XLF) Â rose 25% from its low in late August to the end of November but the sector remains underweight in portfolios compared with historical data.
Bank of America/TheStreet
Dip offers better entry point for bank stocks
The financial sector ETF’s 5.9% decline in November was worse than the 2.5% pullback for the S&P 500 in the same period, creating “an opportunity to add exposure at a better entry point,” B of A said.
Others are seeing the potential value in financial stocks as well.
“Deeply shunned over much of the past two decades, especially in the wake of the high-profile regional bank failures in 2023, financials have recently begun attracting more investor attention and steadily outperforming the broader market,” said Christian Floro, senior associate and market strategist at Principal Asset Management.Â
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“The more positive economic environment and its knock-on effects should help create an attractive earnings environment through 2026, helping extend positive investor sentiment in the sector,” Floro added.
That could leave bank stocks set for post-earnings gains, particularly if the biggest Wall Street firms confirm the expected boost in dealmaking and new stock listings.
M&A boom for banks on the way?
London Stock Exchange Group indicated that while the overall value of M&A deals rose 10% last year to $3.2 trillion, the total number of transactions fell to the lowest levels in nearly a decade amid the strict antitrust regime led by Federal Trade Commission Chairwoman Lina Kahn.
That’s likely to change this year. Forecasts indicate a top-line total of around $4 trillion for global M&A. If so, that would add hefty totals to the bottom-line profits of Wall Street’s biggest advisers, including Goldman Sachs and Morgan Stanley.
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“After suffering year-over-year earnings declines of 10%-15% in the first quarter of 2024, most bank earnings began to recover in the second and third quarters as deposit pressures abated and fee income recovered from multi-decade lows,” said Floro at Principal.Â
“This momentum should continue, with Q4 2024 earnings expected to grow an average of 15%+ for large banks, benefitting from a rebound in M&A activity, while small banks, aided by Fed easing, forecast to grow an average of 5%,” Floro noted.
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