{"id":84171,"date":"2023-11-13T22:01:46","date_gmt":"2023-11-14T03:01:46","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/bank-stocks-the-case-for-buying-the-hated-sector-now\/"},"modified":"2023-11-13T22:01:47","modified_gmt":"2023-11-14T03:01:47","slug":"bank-stocks-the-case-for-buying-the-hated-sector-now","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=84171","title":{"rendered":"Bank Stocks: The Case for Buying the Hated Sector Now"},"content":{"rendered":"
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<\/p>\n<\/figure><\/div>\n

Bank stocks have rarely been so despised. But the group\u2019s worst days appear to be in the rearview mirror.\u00a0<\/p>\n

The
\n SPDR S&P Bank exchange-traded fund
\n (ticker: KBE) is down 18% this year, while the
\n S&P 500
\n is up 15%. In one way, the industry has never been as shunned as it is right now. The market value of all banks in the S&P 500 is less than 10% of the index\u2019s market value, an all-time low, according to
\n Bank of America
\n \u2018s investment research team. <\/p>\n

\n

The Federal Reserve\u2019s rate-hiking campaign has been the primary driver of that weakness. Central bank officials have lifted short-term interest rates so much that profit margins in lending businesses, which rely on borrowing short-term money to make longer-term loans, have plummeted. Making matters worse, depositors have yanked trillions of dollars this year from banks and put that money into higher-yielding money-market funds. Lastly, deal activity is down this year, an issue for investment banks.\u00a0<\/p>\n

The underperformance probably won\u2019t get much worse, if history is any guide. The previous low for banks as a percentage of the S&P 500\u2019s market value was in the late \u201980s. That came right before bank stocks rallied to outperform the index through most of the \u201990s. Then in the early 2000s, by the same measure, banks hit close to a new low. Shares of banks then rallied until the 2008-09 Financial Crisis. <\/p>\n

Any turnaround needs fuel. That would come from the Fed, which appears to be close to being done hiking rates. And if rates cuts occur, the
\n 2-year Treasury note\u2019s yield
\n \u2014which remains a touch below its multiyear high\u2014could keep dropping. <\/p>\n

Lower short-term rates would help improve profit margins for loans. Bank stocks started to\u00a0underperform in early 2021 when short-term rates started rising faster than long-term rates. Sinking short-term rates should have the opposite effect and bring about better performance in bank shares.\u00a0<\/p>\n

To be sure, the Fed would have to cut rates because of a weakening economy. But bank stocks have already priced in potential economic turbulence. Once financial markets anticipate more substantial rate cuts, bank stocks are likely to start gaining thanks to an improvement in the outlook for loan demand.<\/p>\n

The demand factor is an important one. Banks\u2019 revenue are still growing this year despite lower margins. That\u2019s because the interest banks can charge is higher. If consumer and business demand for loans remains stable during an economic slowdown, loan volumes can also remain stable\u2014an ideal situation for bank revenue. <\/p>\n

Bank of America (BAC), for example, for example, saw revenue rise 2.9% to $25.2 billion in the third quarter, driven by both higher rates and a moderate rise in loan volumes. Those volumes may weaken over the coming quarters if the economy weakens. But if rates dip, volumes might rebound because it would be less expensive to borrow. \u00a0<\/strong><\/p>\n

Merger and acquisition activity should also rebound if rates dip. A dip in interest rates would help buyers\u00a0finance deals with more ease, while a stable enough outlook for the economy would support the profit outlook for buyout candidates. Take, for example,
\n Goldman Sachs
\n (GS). The company\u2019s investment banking revenue is expected to have dropped 14% year over year to $6.3 billion this year but rebound to over $7 billion next year and over $8 billion 2025, according to FactSet. \u00a0<\/p>\n

As the profit outlook improves, investors should pay even higher multiple for those earnings. Right now, the ETF trades at a multiple of expected earnings per share for the next 12 months of about eight times, less than half of the S&P 500\u2019s multiple.\u00a0<\/em><\/p>\n

All of these areas of improvement should drive EPS for the bank ETF up to over $5 by 2025 from more than 20 cents below that level this year, according to FactSet. <\/p>\n

That looks like nice upside.\u00a0<\/p>\n

Corrections & amplifications<\/strong>: Bank of America\u2019s revenue rose 2.9% to $25.2 billion in the third quarter. A previous version of this article incorrectly said revenue rose 6% to $10.5 billion.\u00a0<\/em><\/p>\n

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com<\/p>\n<\/p><\/div>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Bank stocks have rarely been so despised. But the group\u2019s worst days appear to be in the rearview mirror.\u00a0 The SPDR S&P Bank exchange-traded fund (ticker: KBE) is down 18% this year, while the S&P 500 is up 15%. In one way, the industry has never been as shunned as it is right now. The […]<\/p>\n","protected":false},"author":1,"featured_media":84172,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"gallery","meta":{"footnotes":""},"categories":[241],"tags":[83],"class_list":["post-84171","post","type-post","status-publish","format-gallery","has-post-thumbnail","hentry","category-markets","tag-featured","post_format-post-format-gallery"],"yoast_head":"\nBank Stocks: The Case for Buying the Hated Sector Now | iFintechWorld<\/title>\n<meta name=\"description\" content=\"Bank stocks have rarely been so despised. 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