Bank Stocks Hit Historic 80-Year Low Vs. S&P 500: Analyst Sees Bear Market Bounce As Fed Rates Peak

Analysts at Bank of America saw a buying opportunity in U.S. bank stocks, as the peak in interest rates could resolve many of the current issues for the sector.

In a note published on Monday by a team of analysts, including Ebrahim H. Poonawala and Brandon Berman, Bank of America revealed that American bank stock prices are trading at their lowest level compared to the S&P 500 index in over 80 years.

The sector, which included small and medium-sized banks, had been facing challenges since the crisis that affected Silicon Valley Bank and Signature Bank in March. Currently, it was trading at appealing valuations, and there was a declining consensus among Wall Street analysts regarding the profit outlook for 2024.

According to Bank of America, these two factors could potentially lead to a bear market bounce in the upcoming months.

The SPDR S&P Regional Banking ETF KRE was down 26% year-to-date but had already rose 10% since the beginning of November, outperforming other industries.

An equal-weighted index of U.S. banks, as tracked by the SPDR S&P Bank ETF KBE, was down 16%, while a broader cap-weighted index of financial stocks, the Financial Select Sector SPDR Fund XLF, was down only 2%.

Chart: Regional Banks Have Underperformed The Broader Financial Sector In 2023

Bank of America believed most pressure points for banks, such as rising deposit costs, commercial real estate repricing and recession-induced credit losses, depend on the risk associated with having higher interest rates for a longer period.

“Lower rates reduce the likelihood of tail risk events and result in higher valuation multiples for bank stocks that are trading near 80-year lows compared to the S&P 500,” Bank of America stated in the note.

Analysts drew parallels with the mid-’90s when bank stocks rose by 54% in 1995, outperforming the S&P 500 by 34%, thanks to a Fed pause following a 250bp rate hike.

Source: Bank of America

Net interest margin pressures for U.S. banks are expected to ease in 2024 due to moderating deposit repricing pressures. Additionally, dividend yields could become a factor again if Street expectations for lower rates and Fed rate cuts solidify in the coming months.

Bank of America suggested investors should selectively add exposure to banks, especially if two conditions are met: peak interest rates are in the past and there is no U.S. recession in 2024.

Presented below is a table displaying Bank of America’s price projections for a group of U.S. banking stocks:

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