A pivot from Federal Reserve Chair Jerome Powell has investors betting that US bank stocks are poised to move higher as lower interest rates are expected to provide much-needed relief to some beleaguered lenders.
That wager sent an index tracking mid-size regional banks ( ^KRX ) up 5% Friday, the biggest single-day advance for the index in all of 2024. It held those gains on Monday.
That considerable move came after Powell gave markets the all-clear signal by saying, "the time has come to adjust policy," setting up the first Fed cut in more than four years.
An index tracking the wider banking sector ( ^BKX ) is now up more than 18% on the year, in line with the performance of the S&P 500 ( ^GSPC ).
Regional banks are still lagging behind the rest of the industry in terms of their performance; the KBW regional bank index ( ^KRX ) is up 6%.
"There will likely be a regional bank catch-up trade," Eric Wallerstein, chief markets strategist at Yardeni Research, told Yahoo Finance.
Incremental rate cuts over the next six months "would be really helpful for those banks that are sitting on pretty bad credit quality," Wallerstein added.
In fact, two regional banks with heavy exposures to weakened commercial real estate borrowers — New York Community Bank ( NYCB ) and Valley National Bank ( VLY ) — each jumped by 9% on Friday.
Interest rate cuts aren't an automatic win for banks, especially if the Fed winds up making deeper or faster cuts to head off a recession.
"Guaranteed the worst outcome for banks right now is an economic slowdown," Wallerstein added.
The slower the Fed cuts rates the better chance banks will have to adjust their own balance sheets, according to Ebrahim Poonawala, a bank equities analyst with Bank of America Securities.