Bank stocks set for big gains ahead of possible Fed rate hikes


Bank investors are ready for higher treasury returns.

The financial sector of the S&P 500 gained 5.4% last week, the first five trading days of January. This was the best start to a calendar year since 2010. The earnings contrasts contrasted sharply with the 1.9% decline in the broader S&P 500 index.

Investors are betting that looming interest rate hikes will boost profits in the financial sector and make the sector more attractive than the tech sector, a major contributor to last year’s rally.

The KBW Nasdaq Bank Index rose 10% last week, the largest percentage increase since November 2020. The tech-heavy Nasdaq Composite fell 4.5% last week, its strongest since March 2020.

The S&P 500 financial sector rose 0.8% on Tuesday.

Last week’s surge came after the Federal Reserve signaled mid-week that officials could hike rates faster than previously expected as early as March. On Tuesday, 10-year government bond yields hovered around 1.745%, down from 1.666% a week ago.


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Banks have still managed to make the most recent blockbuster profits thanks to big profits in trading and doing business. But higher interest rates would help their bread-and-butter business.

Banks make their money in part by charging higher interest rates on their loans than they pay out on their deposits, and they tend to raise the interest rates on loans before increasing them on deposits.

Interest rates on some types of loans, such as mortgages, tend to move in line with the yield on 10-year government bonds.

Banks also tend to hike rates on some corporate and commercial real estate loans when longer-term yields rise.

These returns can be a proxy for market expectations for Fed rate hikes. When the central bank raises its key interest rate, banks tend to raise their interest rates on credit cards and some floating rate loans.

“The margin between what you ask for borrowing versus what you pay for deposits will widen as interest rates go up,” said Jason Goldberg, a banking analyst at Barclays who advises investors to position themselves in banks in 2022.

Some banks are already benefiting. Regions finance Corp.

, M&T Bank Corp.

and citizen finance group Inc.

all rose about 15% last week. On Tuesday, M&T and Citizens won, but the regions fell.

“The environment for financial stocks is very favorable: rising interest rates can increase banks’ margins, and a strong economy can lead to increased borrowing,” said Greg McBride, chief financial analyst at

For now, investors look to the week’s gains for more clues about corporate earnings.

JPMorgan Chase & Co., Citigroup Inc.

and Wells Fargo & Co., some of the largest banks in the US, announced fourth quarter results on Friday.

Many Most Central Bank officials have slated a rate hike of at least three-quarter percentage points for this year, though some bankers are hoping for more.

“I would be personally surprised if it were only four increases,” JPMorgan chief executive Jamie Dimon said on CNBC Monday. “It’s a very, very small amount and very easy for business to absorb.”

The Federal Reserve announces it will accelerate the wind-down of its bond-buying program, the biggest step the central bank has taken to reverse its pandemic-era incentives. Here’s a look at how tapering works and why it makes the markets nervous. Photo illustration: Adele Morgan / WSJ

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