Bank stocks have surged nearly 30% since Election Day as investors position for a mix of higher interest rates, stronger growth, and a rollback of some crisis-era regulations under President-elect Donald Trump. These expectations are now being priced into the shares of Goldman Sachs and JPMorgan, which sit at record highs, as well as recovering firms such as Morgan Stanley and Bank of America.
Goldman Sachs is up 35% since Election Day, as is BofA. Morgan Stanley has surged 28% and JPMorgan has gained 25%. All of these stocks have been fueled by a move in the 10-year U.S. Treasury yield to 2.37% from 1.8% that is expected to improve banks’ interest income. But now what? After a bumper rally some analysts are advocating caution...
...those concerned over the swiftness of the rally may be missing the bigger picture. With banks widely expected to report strengthening fourth quarter-earnings, there’s a case 2017 will be the most profitable year in Wall Street’s history...
...there’s regulatory relief. Since 2009 banks have paid out $233 billion in fines to regulators like the Department of Justice and Securities and Exchange Commission, according to an analysis by KBW. Now, many expect the emphasis on sanctions to fade under Trump. Relief from the specter of multi-billion dollar fines will give greater visibility into banks’ earnings and their plans to return investor capital. There are other prospective earnings tailwinds ranging from tax reform, to a loosening of capital requirements and a rethink of restrictions like the Volcker Rule.
Bottom Line: There’s good reason to believe the bank stock rally will persist. Investors got wind of how undervalued bank shares were in the fourth quarter. Now the big question for 2017 is just how profitable these banks can be.
(Excerpt) Read more at forbes.com ...
