The S&P 500, an index composed of the biggest publicly traded companies in the U.S., hit another all-time high this week. And in an unusual twist, it has been financial stocks at the forefront of the rally. The share prices of big banks have hit all-time highs, helping the finance sector eclipse tech on some days in pushing the S&P higher.
As of Thursday, the S&P is up more than 18% so far this year; Goldman Sachs is up nearly 24% during that span, while JPMorgan shares have climbed over 20%.
All of this comes as a surprise given how financial stocks have for years lagged the rest of the market, and as it was only a year ago the banking sector was in crisis following the collapse of Silicon Valley, First Republic, and other big names. So why are bank stocks soaring?
According to Dave Donabedian, the CIO of CIBC’s private wealth division, “sticky money is flowing into the sector for the first time in a long time.” The reasons for this, he says, include investors looking to branch out from the “Magnificent Seven” tech stocks, and because many bank stocks pay juicy dividends.
Donabedian adds, however, that this is taking place even though lending—long the backbone of the banking industry—is not booming, and the macroeconomic environment is not particularly favorable. This suggests that financial stocks are soaring as part of a broader pattern of exuberance that have led some to warn a market correction is coming.
In the near term, though, there may be room for bank stocks to climb higher thanks to better than expected inflation numbers—a sign lower interest rates could be on the way—announced on Thursday.
Banking crisis recedes
Flash back to 2023 and the banking sector was on fire. Regional stalwarts like Silicon Valley Bank and First Republic collapsed unexpectedly and investors, along with regulators, watched nervously to see how far the contagion would spread.
Today, the market appears to think banks have weathered the storm, according to Tomasz Piskorski, a finance professor at Columbia Business School. He points to several reasons for this.
For starters, the recent banking crisis never really threatened big banks in the first place. That’s because their balance sheets are much larger, notes Piskorski, meaning they were better able to absorb the shock of rising interest rates and the collapse of commercial real estate—two of the main factors that put pressure on the banking sector in the first place.
In the case of high interest rates, which resulted in the likes of First Republic having to take big markdowns on the value of their long-term securities, Piskorski notes that big banks held a greater proportion of their assets in cash. As for commercial real estate loans, they accounted for only around 5% of the banking giants’ balance sheets versus around 25% for some regional banks.
What’s more, the crisis actually benefited giant retail banks in some ways. That’s because a significant number of skittish customers at smaller institutions fled to the likes of JPMorgan in the belief they would not fail, making the big banks even bigger.
Finally, notes Piskorski, the aggressive actions of the FDIC and other financial regulators in response to last year’s crisis served as a signal the U.S. Government will be quick to intervene in times of trouble for the banking industry—leading investors to become more confident in the sector.
“However, this does not mean that banks are completely stable,” he adds. “Banking is a confidence game and investors’ and depositors’ beliefs could quickly shift in response to negative news. If interest rates remain elevated, and given persistent problems in commercial real estate, several smaller and mid-size banks could still face solvency issues.”
It may be rare to see financial stocks as a hot investment, but for now at least, they are enjoying their time in the sun.
