Bank Stocks Rebound

A Pandemic Recovery Play

Bank stocks are making a comeback, driven by investors seeking exposure to the economy’s recovery. Bank stocks, including JPMorgan Chase (JPM) and Bank of America (BAC), are on track to have their best year ever when compared to the performance of the S&P 500 Index.

In the years since the financial crisis of 2007 and 2008, bank stocks have underperformed the broader market. Shares were particularly battered last year during the onset of the pandemic. Last year the KBW Nasdaq Bank Index underperformed the S&P 500 index by 30 percentage points. Now some investors may view bank stocks as a safe way to capitalize on post-pandemic economic recovery. The bank index is up 37% in 2021 compared to the S&P 500’s 11% gains.

Rising Rates Could Help Banks

Investors are thinking about when the Federal Reserve will raise interest rates again as the economy shows signs of a recovery. Some are moving away from tech stocks, which tend to do well in low interest rate environments, and shifting to bank stocks, which could benefit from higher interest rates.

Since the start of the year, roughly $32 billion has been invested into bank stocks, setting a 12-month record in less than six months. Banks’ cautious stances last year are also aiding share prices. Banks placed billions of dollars in reserves to prepare for record defaults during the pandemic which never materialized. They are now putting some of that cash to work.

More Growth to Come?

Despite the increase in bank stock share prices, bulls think there is still more room for growth. Bank stocks are still one of the cheapest sectors in the stock market, trading at around 13 times next year’s expected earnings. The S&P 500 is trading at around 22 times expected 2022 earnings. Some proponents of bank stocks argue economic strength in 2023 and 2024 is not factored into the current share prices.

In the coming months, investors will be watching closely to see if banks will have the ability to increase their loan books after a year when loan volume decreased. The pandemic caused a number of unexpected twists and turns for the banking industry and there are still a number of unanswered questions about the future of banks and their stocks.

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