Bank bull run seen thundering onward with hedge funds loaded up
Eleanor Harmsworth
6 min read
(Bloomberg) — It’s been a banner year for US bank stocks by almost any measure. For many of the sector’s most respected observers, the best is yet to come.
Wells Fargo & Co. analyst Mike Mayo says net interest income could climb to a record in 2025. Barclays Plc’s Jason Goldberg says earnings-per-share growth will rise at an almost double-digit rate over the next two years. and they’re hardly the only ones that are bullish.
Hedge funds piled into shares of financial firms in the third quarter, boosting their exposure to more than $340 billion, a 50% increase from just three months earlier, according to 13F data compiled by Bloomberg. Meanwhile, market watchers expect much of what fueled the more than 33% surge in bank shares this year — topping both the S&P 500 and tech heavy Nasdaq 100 — will continue to be a tailwind in the months to come. That includes a pick up in capital markets activity and loan growth.
Should expectations for a wave of deregulation and lower taxes under the incoming Trump administration come to fruition, many say bank stocks have plenty more room to run — even if the Federal Reserve keeps interest rates higher for longer than had been expected.
Wall Street is at a turning point when it comes to everything from “traditional banking revenue to deposits, loans, capital markets, operating leverage, EPS growth and the easing of the regulatory burden,” Mayo said. “And these inflections are happening all at the same time.”
Some optimism that banks will benefit from deregulation — potentially including easier capital rules — already boosted share prices after November’s election. That was somewhat tempered by concerns over President-elect Donald Trump’s signature unpredictability, which could cause political and economic shifts that bank executives would have to navigate.
“We expect 2025 could be choppy and a year of two halves,” JPMorgan Chase & Co. analysts led by Vivek Juneja wrote in their 2025 large cap bank outlook. They foresee the potential for “near-term continued choppiness due to uncertainty related to policy changes, but a potential favorable resolution of capital requirements could be a positive” longer term.
Despite the potential for volatility, banks have been drawing interest in key areas of the market, with investors hoping to profit from any regulatory reprieve that a Trump administration may bring.
In addition to hedge funds, which boosted their allocations to financial shares to 13.4% in the last quarter, Stanley Druckenmiller’s Duquesne Family Office added almost a dozen US banks to its portfolio, including Citigroup Inc. and regional lender KeyCorp. Elsewhere, George Soros’ family office had previously increased its allocation to First Citizens BancShares Inc.; Cercano Management added JPMorgan and Bank of America Corp., while Iconiq Capital, a Silicon Valley multifamily office and wealth firm, bought stakes in a spate of US banks.
The past year has not always been easy and, at times, disappointing earnings and notable pullbacks have accompanied the ascent. In July, Wells Fargo sank the most in three years after reporting net interest income that fell short of expectations, while Citigroup slumped with expenses in focus, and JPMorgan fell after its forward guidance failed to impress. By October, after the Federal Reserve had started to cut rates, it was a different story - even though the rate cuts would not have impacted those earnings.
“Almost across the board results have been better-than-expected and the stock prices have reacted accordingly,” Barclays’ Goldberg wrote in a note following the results.
In a recent note on banks, analysts at Wells Fargo say the main driver for better earnings is a normalization of the net interest margin in an extended period when interest rates are above zero. According to Wells Fargo’s report, the value of deposits will become more apparent as rates stay higher. Their bull case sees net interest income reaching a near record in 2025, and estimate that at 5% rates, deposits are worth four times as much as when rates were 1%.
Meanwhile, analysts at Strategas place financials first in their Technical Sector Rankings rankings, for both large and small cap companies, thanks to strong underlying trends, leadership, and momentum. Not to be deterred by the pullbacks, analyst Todd Sohn says they tend to view corrective phases as an “opportunity to add long exposure when a sector scores in the top tier, and suspect that may be the case for financials as 2025 comes into view.”
‘Priced for Perfection’
Not everyone is bullish on banks. Morningstar’s Suryansh Sharma is the only analyst with sell rating on Goldman Sachs Group Inc., Bank of America and Wells Fargo. He warns that expectations around earnings are so optimistic that shares are vulnerable to any negative surprise.
“A big risk signal is when stocks are priced for perfection,” Sharma said. “So when anything bad happens we have a re-rating.”
Most agree that the success or failure of banks and financials in 2025 is heavily influenced by the overall health of the US economy. “If we have a recession all bets are off,” Mayo caveats. “It will be sell stocks first and ask questions later.”
A reality check arrived from the Fed at its mid-December meeting, when officials dialed back expectations for rate cuts in 2025. Banks shares swooned, all but reversing their post-election advance, with the KBW Bank Index falling 4.3% and its regional sister gauge slumping 5.3%.
Most market watchers, like Mark Luschini, chief investment strategist at Janney Montgomery Scott saw the general market rout as a “knee-jerk reaction” and “overdone.” And with banks often viewed as a reflection of the economy, their moves tend to be more exaggerated.
Barclays’ Goldberg notes that while animal spirits are coming to life, any new policies will take time to take hold. While he expects earnings in January to deliver higher revenues and operating leverage, solid share repurchasing and stable credit quality, he notes that bank-friendly policies would only be established after Trump’s inauguration at the end of January.
“Certainly investor interest has picked up post the election but there is some hesitancy given uncertainty over the timing and polices of the the administration,” Goldberg said.
Meanwhile, Mayo remains sanguine, predicting a paradigmatic shift in how investors consider their bank holdings. Going into year end there will be a continuation of a “dating mentality” that investors tend to have toward bank stocks, according to Mayo.
“But the visibility and confidence on a series of years of higher earnings ahead is likely to see more investors getting married to bank stocks and holding them for many years to come.”
