Underperformers No More!
Investors finally got excited about bank stocks in 2024, particularly toward the middle of the year as the Federal Reserve began signaling cuts to interest rates. The Nasdaq Bank index rose 16.7% during the year, compared to 10% growth in a broader market index, the Russell 2000, according to Piper Sandler & Co. For the past decade, low interest rates and uncertainty about credit have kept bank stock prices low compared to broader indexes, especially the S&P 500.
“Banks are cyclical,” says Frank Schiraldi, managing director and senior research analyst at Piper Sandler & Co. “They’re feast or famine.”
The year 2025 seems ready for a feast. The market has priced in expectations for better earnings in 2025, hoping for improved loan growth as lower interest rates lure borrowers back to investing in their businesses and applying for loans.
The Fed began cutting rates in September. Donald Trump’s election also lifted bank stocks, amid hopes of a lighter touch on regulation, according to Jeff Davis, managing director of the financial institutions group at Mercer Capital.
But a lot could still go wrong. If higher rates of inflation return or banks fail to meet analyst expectations for improved earnings, bank stocks could easily retreat. Already, stock prices for the Russell 2000 and the Nasdaq Bank index have fallen a bit in the new year, by 2.5% and 4.3%, respectively, as of mid-morning Friday. “We just have to see the banks deliver on earnings,” Davis says. “I’ll put [investors] in the category of, ‘What have you done for me today?’”
Publicly traded bank stocks remain relatively inexpensive, with the bulk trading at about 11 to 13 times forward earnings, based on 2025 consensus estimates, Davis says.
Compared to tech companies, which often trade north of 20 times forward earnings, bank stocks seem like a good deal. But banks haven’t had an easy time competing with tech companies for investment dollars. “Technology has been a black star as it relates to investment capital,” Davis says. “It has absolutely sucked money in, and it has pulled money away from bank stocks, retail, REITS and industrials and the like.”
• Naomi Snyder, editor-in-chief for Bank Director
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