Wall Street sees buying opportunity in banks as shares tank ahead of earnings
The sell-off in bank stocks ahead of earnings season may be a buying opportunity rather than a warning sign for the economy, Wall Street analysts told CNBC. Large-cap banks have fallen into correction territory ahead of third-quarter earnings next week, with the Invesco KBW Bank ETF (KBWB) dropping 12% from a mid-August high — even as the broader market reaches fresh highs. Last week, the Nasdaq reached an all-time high on Monday, while the S & P 500 rose to an all-time intraday this week. Over the past month, JPMorgan shares have dropped 7%, Goldman Sachs has fallen 15%, Bank of America has tumbled 16%, Morgan Stanley fell 13.7% and Wells Fargo is down 9%. The S & P 500, meanwhile, has gained 4% over the same period. The divergence comes as investors grapple with a more hawkish Federal Reserve, persistent inflation and a sharp rise in Treasury yields — fueling concerns that higher borrowing costs could weigh on lending and economic growth. “The decline in bank stocks is a manifestation of the market’s expectations that there are more rate hikes ahead,” said Chris Grisanti, chief market strategist at MAI Capital Management. However, he thinks fears may be overblown. KBWB SPY 1M line KBWB vs SPY in past month Last month, the Fed hiked rates as expected , while signaling that there could be more increases ahead as inflation remained above the central bank’s target. Fed Governor Christopher Waller said on Thursday that tighter policy is needed to bring inflation down. Higher interest rates tend to be seen as positive for banks since they can help increase their margins by earning more on loans. But investors are more concerned the risk of tighter monetary policy could eventually slow lending, create credit losses and raise bank funding costs. Grisanti believes those fears have gone too far. The market is “overly afraid” that additional Fed tightening could possibly lead to an economic slowdown, even though he sees no evidence of that yet. He characterized the sell-off as “more of an opportunity than a harbinger of a downturn.” Still, further rate hikes could put more pressure on bank stocks. If the Fed raises rates from here, “then the credit cycle and the cost associated with it become top of mind for investors,” said Gerard Cassidy, bank analyst at RBC Capital Markets. “They will see the stocks really struggle under those conditions.” Complicating the picture is the 10-year and 30-year Treasury yields having both surged to multidecade highs in recent weeks. That can create higher deposit costs for banks as they raise interest rates to pay depositors. Another risk is slowing capital markets activity. If IPO deals get pushed off into 2027, large banks that have an investment banking arm could get punished. “There’s a concern that we may not see as much business in the equity capital markets area for those banks,” RBC’s Cassidy said. Opportunities ahead Despite the risks, Cassidy believes the weakness in the bank stock prices is a buying opportunity for investors because the “underlying fundamentals remain strong,” and the U.S. economy is “nowhere near a recession,” according to Cassidy. Looking ahead to next week’s earnings, “the outlook should remain very healthy for the banks,” he said. Cassidy called out specific opportunities like Wells Fargo , which he labeled as “an ideal stock to own,” as the stock has been weak all year. Recent negative headlines on lending issues “are not going to distract the company from delivering on its operating plans,” Cassidy said. He also likes Bank of America , which has specifically cited that it’s benefitting from the rollover of maturing assets being renewed at higher rates of interest which will help drive revenue growth. Keycorp , a large regional bank out of Ohio, should benefit from strong commercial loan growth as well as investment banking revenues this quarter, the analyst said. The bank, whose stock has dropped more than 8% over the past month, should also benefit from the onshoring of companies back to the U.S. and the artificial intelligence infrastructure buildout. Shares of PNC down 9% over the past month is another big commercial lender that Cassidy believes should benefit from the growth in commercial lending.
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