Link copied
By David Hollerith
Hope that the Federal Reserve may soon lower interest rates in September is fueling a new leg to this year’s rally in large US bank stocks.
They surged last Friday after Federal Reserve Chair Jerome Powell opened the door to a September rate cut, saying in a speech in Jackson Hole that "the shifting balance of risks may warrant adjusting our policy stance."
On Tuesday, a key index tracking 24 of the country’s largest banks surpassed its previous record high, which hadn't occurred in three years.
The same index surpassed that level again by Wednesday's close.
The setup draws parallels to roughly a year ago, when US banks stocks were beating major indexes. The industry’s bigger lenders were coming off a fresh victory in Washington over their capital levels, and the Fed was beginning its rate-cutting cycle.
Back then, banks and their investors were beginning to dream big. Specifically, that 2024 could be the start of another 1995, the beginning of one of the most profitable periods in US banking history.
Did that come to pass? Will it happen again?
“For banks, I think it's party like it's 1995,” said Mike Mayo, a Wells Fargo bank analyst who admitted that, although "history isn’t likely to repeat, it may rhyme.”
That year, 1995, was when the banking industry began one of its best runs ever after a series of rate cuts from the Fed along with passage of a federal law signed by then-President Bill Clinton the year before that allowed for bigger bank mergers.
Through the end of 1995, the KBW Nasdaq Bank Index (^BKX), which tracks the country's 24 largest banks, finished the year up more than 40%. That outperformance would repeat for two more years.
Over the past 12 months, that same index is up 32%, as of Wednesday.
The index has outperformed the S&P 500 (^GSPC) and Nasdaq Composite (^IXIC) by a respective 16 and 10 percentage points over the past year.
“The bank stocks are once again outperforming the general market,” Gerard Cassidy, a big bank analyst for RBC Capital Markets, told Yahoo Finance. Though Cassidy admitted historical comparisons are rarely perfect, he said he believes “the parallels to the '95 period still hold true.”
There are plenty of differences between banking today and what was happening in 1995. A crucial one, per Mayo, is that there is simply more “competition for investment dollars” now, given that the technology sector, a dominating force in the US stock market, was still in its infancy back then.
Another is that since the '90s the US banking sector has seen substantial consolidation into a handful of megabanks that dominate today’s market.
Case in point: All of the 24 original banks listed in the KBW US Bank index when the product first began trading in September 1992 are represented by just eight banks today after a wave of mergers through three decades.
The average stock performance between the six biggest lenders in that group — JPMorgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC), and Citigroup (C), as well as Wall Street banks Goldman Sachs (GS) and Morgan Stanley (MS) — has been 42% over the past year.
These megabanks have greater scale, more diversification, and bigger capital markets businesses, which have all mattered this year, Chris McGratty, a head of KBW’s US bank research, told Yahoo Finance.
“I'll stop short of comparing today to the '90s, but there's a scenario where we're entering a period of strengthening earnings growth across the industry,” McGratty added.
While Wall Street banking and other fee services have thrived this year, plain, vanilla bank lending still remains tepid, McGratty added.
For large regional bank stocks like US Bank (USB), that’s one significant contributor holding up the rebound. Loan growth rose to 4% across US banks in the second quarter, remaining below the pre-pandemic average of 4.9%, according to a FDIC quarterly report.
If there’s a single reason why bank stocks broadly outside of the country's largest haven’t surged higher over the past year, it's likely due to economic uncertainty from tariffs, according to RBC's Cassidy.
The notion that the past year would have parallels to 1995 was “temporarily put on hold” when the Federal Reserve began holding interest rates steady due to concerns that tariffs rolled out earlier this year were going to create higher levels of inflation.
It remains to be seen how the full impact of tariffs will impact inflation. But for now, given Fed Chair Powell's Jackson Hole Speech, the parallel to 1995 is "back on the table," Cassidy said.