The stock market saw a lot of shear on Tuesday, as different parts of the economy had very different performances on Wall Street. The Nasdaq Composite ended up on the short end of the stick, falling as many of the tech-rich index's components moved lower. However, the Dow Jones Industrial Average (^DJI 0.04%) had the strongest gains, and the S&P 500 (^GSPC -0.16%) managed to rise as well.

Today's stock market


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Data source: Yahoo! Finance.

The banking sector performed well on Tuesday, likely because of growing optimism about the prospects for the U.S. economy to mount a full recovery in time. That lifted shares of the largest banks in the nation by anywhere from 1% to 7%. But in somewhat of a surprise, the biggest winners on Tuesday were stocks of regional banks, which were able to bounce back somewhat from extensive losses so far in 2020.

Widespread optimism in financial institutions

Regional banks often see disparate performance depending on where they're located. However, Tuesday's move higher came from small and mid-sized banks around the country. Consider:

  • Texas-based Triumph Bancorp (TFIN -1.41%) led the way higher with gains of 16%.
  • Close behind were First Hawaiian (FHB -0.50%), Washington Trust Bancorp (WASH -0.78%), and Georgia's Synovus Financial (SNV 1.19%), all up 14% on the day.
  • A host of other financial institutions were up double-digit percentages. That includes New England's Berkshire Hills Bancorp (BHLB -0.56%), Philly area Bryn Mawr Bank (BMTC), and Tennessee-based banks FB Financial (FBK -0.71%) and Franklin Financial Network (FSB).

That's just a sampling of the more than 100 stocks in the industry that climbed 5% or more on Tuesday.

What's lifting regional banks?

Regional banks face challenges that larger institutions don't, but they also have potential advantages. Small and mid-sized banks tend to rely much more on their retail operations, with ordinary Main Street lending and deposit services that depend on healthy net interest margins in order to maximize profits. Unlike Wall Street's big banks, your typical regional bank doesn't have extensive operations in investment banking or internal trading operations, and wealth management is often a less extensive part of the revenue mix.

Savings passbook, cash, a calculator, and a hand holding a pencil.

Image source: Getty Images.

The economic contraction resulting from the coronavirus pandemic sent net interest margins for a loop, and that was largely responsible for the decline in regional bank stocks. Conversely, as the economy starts to emerge from the worst of the crisis, bank investors are hopeful that key business metrics will start returning to pre-coronavirus levels. If that happens, it would bode especially well for those institutions that have seen the most dramatic drops in earnings in early 2020.

It's too early to tell whether Tuesday's pop in regional bank stocks is justified. It's important, though, not to take the day's move too far out of context. Most stocks in the industry are still down significantly for the year, and it'll take real results to prove that improving investor sentiment will turn into lasting share-price gains.