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Economic Kayfabe
Anyone who’s watched a wrestling match since the 1980s is familiar with the concept of kayfabe, even if they might not know the term. Kayfabe is the understanding between the wrestlers and the audience that the drama unfolding is fake, but everyone pretends that it’s real. For the last few years, a lot has been written about kayfabe — so much so that in 2023, Merriam-Webster added the word to its dictionary.
The concept can be extended to the economy. I’ve heard the hedge fund manager Paul Tudor Jones use the phrase “economic kayfabe” to describe the ballooning national debt and the expectation that it won’t cause a fiscal catastrophe.
So far, bank earnings and bank stocks reflect their own sort of kayfabe in the face of tariffs, slower growth in consumer spending and higher interest rates. Many midsized and large banks have reported second quarter earnings, and the results have been remarkably good. As the investment bank Janney Montgomery Scott noted in a report this week: “It was a very good month for bank stock investors. … Second quarter earnings reports generally followed a pattern of improving net interest margins, continued strong asset quality, and improving tangible book value levels. A majority of banks with analyst estimates beat those estimates.”
Of course, there were exceptions. The smallest and less liquid banks have not “fully joined the renewed optimism about the sector,” Janney noted. And there are a number of microcap bank stocks in the bargain bin.
Last week, Christopher Marinac, the director of research for Janney, noted that loan growth in the second quarter had largely improved for banks that had reported so far, but estimates show that softening in the third and fourth quarters.
Profitability also has climbed. For banks above $1 billion in market cap, operating cash flow climbed 12 to 15 basis points in the second quarter for pre-tax, pre-provision net revenue as a percentage of return on average assets, Marinac wrote. “Credit loss experience the past three quarters has been excellent and compares well with 2025/2026 annual estimates,” he said. Credit losses remain below long-term averages.
There may be headwinds ahead. But so far, the wrestling match is on.
• Naomi Snyder, editor-in-chief for Bank Director
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