The US banking sector’s rally just hit a speed bump, courtesy of a reality check from… a British bank. The KBW Bank IndexKBWB

had been on a tear, climbing over 34% in the past year and racking up an 11-day winning streak that pushed it near record highs. But HSBC is now throwing cold water on the momentum, warning that the surge in big bank stocks may be losing steam.

Valuation reality check: American financial institutions took off in early 2025 after Trump’s election victory, and since then, a strong economy and expectations of more deal activity have kept the good times rolling. However, last week, HSBC analyst Saul Martinez warned that current stock valuations have become detached from reality, noting that “downside risks associated with still-elevated macro uncertainty, potentially slowing economic growth and more interest rate cuts through 2025 and 2026 are generally not factored into the stock prices.”

• The analyst downgraded JPMorgan ChaseJPM
  and Goldman SachsGS
  from Hold to Reduce, while cutting Bank of AmericaBAC
  from Buy to Hold.
• He believes that super-regional banks like US BancorpUSB
  , PNC FinancialPNC
  , and TruistTFC
  offer better value even after their own rallies.

The Great Banking Divide

Wells Fargo’sWFC

Mike Mayo is optimistic about the sector’s performance, noting it’s “game on” as long as a recession stays away. In line with that optimism, the SPDR S&P Regional Banking ETFKRE

and SPDR S&P Bank ETFKBE

have climbed 21% and 18% over the past year, reflecting investor confidence in the sector’s earnings resilience, stress test results, and potential regulatory rollbacks. And despite elevated valuations, Bloomberg expects large banks to report year-over-year growth in their investment banking revenue.

• For Q2, Goldman Sachs is set to make $3.7B from equities trading, while JPMorgan is expected to lead fixed income, currencies, and commodities with revenues of $5.2B.
• Conversely, Bank of America warned it could face a 17% decline in advisory fees and a 25% fall in investment banking revenue.

Can earnings justify the hype? The second-quarter earnings season kicks off tomorrow with JPMorgan Chase, CitiC

, and fellow banking giants, marking the first full earnings cycle since President Trump’s trade war launched on Apr. 2. Analysts are forecasting a more modest 5.8% YoY growth compared to the first quarter’s robust 13.7% — indicating companies will need to show a lot more than these lofty valuations to keep investors on board.