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Large bank stocks have had a banner year amid expectations of interest rate policy and optimism for an economic “soft landing.” The Invesco KBW Bank ETF (NASDAQ:KBWB) has appreciated by 31.1% in the past year, while the SPDR S&P Bank ETF (NYSE:KBE) is up 28.7%.
A recent industry report from Bank of America outlined what to look for in the banking sector in the second half of 2024 while offering investment ideas amid today’s uncertain economic environment.
Key Takeaways: The report indicated that the continuance of the bank stock rally hinges on broader economic performance; if a hard landing or stagflation is avoided, it would maintain financial stocks’ upward trajectory.
“We believe investors should maintain exposure to bank stocks given the probability for a wide range of macro-economic outcomes – outright soft-landing (= bank stocks should outperform the S&P), to a low growth economy (=group unlikely underperforms), to the potential for a hard-landing (= bank stocks could mark a new bottom for this cycle),” the report said.
The report also pointed to the 2024 U.S. Election as a determinant of sector performance. According to the BofA’s equity strategy team, financial equities have outperformed the S&P in election years since 1976. The report also foresees a change in Basel III regulations, citing statements by Fed Chair Jay Powell and Vice Chair Michael Barr.
“We expect bank stocks to remain well bid into the US presidential elections (absent a macro shock on GDP/inflation/rates) given potential for an improved regulatory backdrop, pick-up in bank M&A; while stimulus spending expected to flow through the US economy (fate of Trump consumer tax cuts being watched).”
The report believes that while future Fed rate cuts will hurt industry EPS, lower rates “should also provide support to a more constructive outlook on credit quality, funding relief (easing deposit pricing competition), and capital (fading concerns tied to MTM losses on bond books).” The report expects that lower margins will be largely transitory.
Investment Ratings: In light of its generally positive industry outlook, Bank of America holds Buy ratings for the following large financial institutions.
Price Action On Monday:
(All share prices taken at the time of writing)
Also Read: ‘Inflation Bump Is Over,’ Says Paul Krugman: How Friday Data Proves Him Right
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