Bank stocks back in vogue on stimulus, interest rate outlook

New York

BIG US banks have gone from losers to leaders in the stock market, rebounding from a pandemic-induced pummelling as investors anticipate a surge in federal spending in 2021 and look ahead to this week's earnings season kickoff.

Whether they maintain that momentum depends on the success of President-elect Joe Biden's agenda, Federal Reserve monetary policy and how quickly Covid-19 is brought to heel. Investors have been optimistic about economic growth, with banks enjoying a bump in interest rates as they increase lending, deal-making and trading. Last month's reintroduction of bank stock buybacks and Mr Biden's selection of Janet Yellen as Treasury Secretary in November also helped.

The KBW Bank Index has jumped 8.4 per cent in January, beating the S&P 500 Index's 1.8 per cent advance. Last year, the bank gauge tumbled 14 per cent while the broader market rose 16 per cent. Three of the nation's largest lenders - JPMorgan Chase, Citigroup and Wells Fargo - release quarterly earnings on Friday. Bank of America and Goldman Sachs follow on Jan 19. Morgan Stanley reports on Jan 20.

Large and regional bank stocks staged a late-year comeback on vaccine optimism and a rotation into value stocks from growth stocks, Keefe Bruyette & Woods analyst Christopher McGratty wrote in a note last week. Heading into earnings season, "relative stock performance will be less about the quarter and more about the outlook" for credit, profits and capital management, he said.

Goldman Sachs closed at a record high on Jan 7. Wells Fargo analyst Mike Mayo had predicted that, after better-than-expected earnings at Jefferies Financial Group reinforced his view that "capital markets should remain stronger for longer and that Goldman's results should exceed".

On Friday, Goldman's commodities traders were said to have doubled their revenue in 2020, signalling that Wall Street desks managed to print profits into the year's finale.

Bank stocks have "moved back into vogue" due to optimism about fiscal stimulus, infrastructure spending, rising interest rates and bigger capital returns, Goldman analyst Richard Ramsden wrote last week. He highlighted stock outperformance since the Fed released its special crisis stress test results in December, which aligned with his view that bank returns should "rebound and recoup" nearly three-quarters of 2020's decline during the next two years. BLOOMBERG

READ MORE: Banking through the crisis: A test of speed, personalisation and purpose