What happened
Major Wall Street bank stocks rose along with the broader market today after a lot of selling in recent weeks and as investors look for the Federal Reserve to potentially pivot on monetary policy.
Shares of Bank of America (BAC -1.74%) traded nearly 3.7% higher in the final hour of trading today. Shares of Citigroup (C -1.87%), traded nearly 4% higher, and shares of JPMorgan Chase (JPM -0.55%) were up more than 4%.
So what
After a solid day for stocks yesterday, news that the Reserve Bank of Australia would only be raising its key benchmark interest rate by 0.25% instead of the half point investors had initially thought it would sent U.S. stocks surging today. Investors seem to think that perhaps the Fed will be the next to pivot or at least slow the pace of its rate hikes.
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While the S&P 500 is still down more than 21% this year, the broader benchmark index is now on pace for its best two-day rally in two years.
Banks are heavily linked to the economy, and while they benefit from some inflation, which tends to trigger higher interest rates, too much inflation, like what we've seen this year, is usually not a good thing for them. The Fed's rate hikes could knock the economy into a recession, increase loan losses, and slow down business and consumer activity.
Still, I think that the fact that banks are currently in the most rapidly rising rate environment since before the Great Recession will bode well for many large banks, especially Bank of America and JPMorgan Chase, which should see expanding margins.
Citigroup analyst Keith Horowitz earlier today also initiated a "positive catalyst watch" on JPMorgan Chase, which is one of his "stronger conviction" buys. Horowitz said investors have sold off bank stocks this year, largely due to credit concerns, but he thinks JPMorgan will surprise on earnings when it reports in a few weeks.
"We believe a 3Q earnings beat on the top line will lead to upward revisions on full-year guidance and imply a better run-rate into 2023," he said. "They have been more disciplined than others on being patient to deploy cash, and now have the opportunity to extend duration at higher rates."
I also think it's possible that Bank of America meets or raises its outlook for net interest income (NII), which is the profit banks make on loans and securities after funding those assets. Bank of America is one of the largest beneficiaries of rising rates in the industry, and CFO Alastair Borthwick sounded positive about the bank's NII outlook at a recent conference.
Now what
I don't know if I'm ready to connect the dots between the Reserve Bank of Australia and the Federal Reserve just yet. I think the Fed will only ease up on rate hikes if new data in the coming months shows that inflation has peaked and could start to slow.
But I do like all three of these bank stocks and believe that the banking system as a whole is well equipped to deal with whatever recession might come its way.
Bank of America and JPMorgan are large beneficiaries of the higher-rate environment, while Citigroup is executing a multiyear transformation plan that looks to be the right recipe for success this time around.
