Bank Stocks Have Tumbled Since the Fed Hike. Earnings Could Bring Some Answers
The Fed’s September rate hike raised borrowing costs and squeezed bank profitability, sending investors running from the sector. Now earnings season arrives with bank stocks under pressure and investor positioning near levels where it has typically bottomed outside of crises.
What the September hike did
The Fed raised its benchmark rate by 0.25% to a target range of 3.75% to 4.00% on Sept. 16, its first increase since 2023.
Short-term borrowing costs for lenders rose immediately. The State Street SPDR S&P Bank ETF has fallen 12% to $63 from an August record just above $71.
The yield curve has flattened, meaning short-term Treasury yields climbed faster than long-term ones. That squeezes lending profits because banks fund themselves with short-term money.
"What's happening with financials and banks in particular seems a bit much all at once."
Christopher Shaffer, Talaria Capital Management
This week the damage landed on the largest names. Citigroup, Bank of America, and JPMorgan Chase all saw their shares decline.
The Financial Select Sector SPDR ETF slid 0.99% as well. The SPDR S&P 500 ETF Trust fell just 0.3%, so the pressure sits in banks, not the broad market.
One company-specific headline hit. Bank of America's Merrill Lynch unit agreed to pay $39M to settle a class action over idle retirement cash swept into near-zero-interest accounts.
The cheap-versus-stretched split
The bank ETF trades at just over 10 times earnings. The S&P 500 sits at just over 19 times. Morningstar reads it differently for the Wall Street side of the business.
US banks trade at 2.6 times tangible book value and at an 11% cap-weighted premium to fair value estimates as of Sept. 8.
Investment banking and trading revenue grew 34% in the second quarter, reaching $280B on a trailing 12-month basis. US segment returns on equity hit 22.4% against a five-year average of 15.7%.
That strength is the problem. Morningstar expects modest revenue declines for US banks in 2027-28 and weakness in 2028-29 as the merger boom fades.
Among universal banks, Morningstar rates Bank of America four stars with a $66 fair value estimate. Wells Fargo also carries four stars and a $93 fair value, after growing average deposits 10.1% year over year.
Why October reports matter most
JPMorgan Chase reports Oct. 13, with Goldman Sachs also reporting in October. JPMorgan hasn't missed earnings estimates since 2022, and Goldman hasn't missed since 2023, per FactSet.
The trade splits by business mix. Lending-heavy universal banks look more defensible than pure-play investment banks sitting on peak-cycle revenue.
Smaller lenders tied to short-term rates offer a different angle. Bank7 generates ~$98M in banking revenue with a market cap near $519M, and Live Oak Bancshares ($LOB) produced ~$526M in revenue at a roughly $1.7B valuation.
Expectations are already low. Bank of America CEO Brian Moynihan said third-quarter trading revenue would land roughly flat year over year, with investment banking possibly disappointing.
"The upcoming reporting season, kicking off with JPM on 10/13 will be particularly important for financials commentaries," wrote Evercore strategist Julian Emanuel.
A Deutsche Bank survey shows portfolio manager positioning in financial stocks below its long-term median and near levels where it usually bottoms outside of crises. Analysts expect 12% annual earnings per share growth for the bank ETF through 2028.
