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An upbeat start to Wall Street's earnings season, combined with dovish signals from Federal Reserve Chair Jerome Powell, has unleashed a powerful rally across U.S. regional banks, marking their strongest two-day performance since Donald Trump's 2024 election victory.
The SPDR S&P Regional Banking ETF (NYSE:KRE) surged another 3.6% on Tuesday, after rising 2.2% on Monday. That 5.9% gain marks its best two-day performance since Nov. 7, 2024, when investors rushed into smaller financials on expectations of lighter regulation and increased M&A activity under a Trump administration.
Notably, all 161 holdings in the KRE ETF traded in positive territory by late afternoon trading on Tuesday, highlighting a rare instance of broad-based enthusiasm across an industry that has largely underperformed in 2025.
The biggest gainers included NBT Bancorp Inc. (NASDAQ:NBTB), Hingham Institution for Savings (NASDAQ:HIFS) and The Bancorp Inc. (NASDAQ:TBBK), each up between 6.5% and 7%.
On Tuesday, major Wall Street banks, including JPMorgan Chase & Co. (NYSE:JPM), Goldman Sachs Group Inc. (NYSE:GS), Wells Fargo & Co. (NYSE:WFC) and Citigroup Inc. (NYSE:C) all topped estimates during the third quarter, reassuring investors about the health of the financial sector.
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Shares in Wells Fargo jumped nearly 8% – the top performer within the S&P 500 – while Citigroup also rose by a robust 4.2%. JP Morgan and Goldman Sachs traded 1.5% and 1.3% lower, respectively.
Favorable tailwinds for small and mid-sized banks also came from Powell's Tuesday speech, which reiterated that the Fed remains on track for two more interest rate cuts this year.
"The rising downside risks to employment have shifted our assessment of the balance of risks," Powell said, reaffirming the Fed’s decision to cut in September and signaling more easing ahead.
According to the CME FedWatch Tool, traders now price in a near-certainty of a 25-basis-point cut at the Fed's Oct. 30 meeting, with a 95% chance of another cut in December, bringing the federal funds rate down to 3.50%-3.75%.
Despite Powell’s mention that employment data "does not appear to have changed much" since September, analysts keyed in on the Fed's increasingly cautious tone on inflation.
According to CME FedWatch, investors almost entirely price a 25-basis-point cut at the Oct. 30 meeting, and there is a 95% chance of another cut to 3.50%-3.75% occurring in December.
Powell said that outlook for employment and labor "does not appear to have changed much" since September, even as growth surprises to the upside.
He highlighted that “growth in economic activity may be on a somewhat firmer trajectory than expected," suggesting a still-resilient backdrop but one that may not hold the Fed back from further cuts, given the ongoing risks.
According to Peter Williams, analyst at 22V Research, while Powell's inflationary baseline remains a benign one, he repeated his two-sided caution from the September press conference that "there is no risk-free path for policy as we navigate the tension between our employment and inflation goals."
Another key takeaway from Powell's speech involved the Fed’s balance sheet strategy. He signaled that quantitative tightening (QT)—the reduction of the Fed's balance sheet—will likely conclude by year's end, as the central bank aims to maintain reserve levels "somewhat above" what it considers ample.
"The Fed is being cautious to avoid money market strains like those seen in September 2019," Powell said, reinforcing a risk-averse stance amid volatile liquidity conditions.
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