US banking stocks off to record start for 2022, fueled by hawkish Fed

Bank stocks started the new year with their best start in more than a decade as the Federal Reserve’s hawkish tone extends the cohort’s winning streak after the best annual performance since 2013.

The KBW Bank Index, which tracks 24 of the biggest US lenders, has jumped around 10% so far this week, putting it on track for its biggest five-day gain to start a year. Investors have piled into bank stocks amid a surge in U.S. bond yields as signs mount that the Fed could start raising interest rates as early as March.

Rising rates and an acceleration in loan growth are “the two main catalysts for investors to become more bullish on bank stocks,” Raymond James analysts, including Wally Wallace and David Long, wrote in a note.

This week’s surge, which is expected to include back-to-back records for the KBW banking index, received an additional boost on Wednesday after Fed minutes revealed that policymakers had discussed the possibility that a strengthening of the economy and higher inflation could force them to raise rates sooner and faster than expected.

Still, not everyone is convinced that this year’s early blowout for bank stocks will continue. “The rush in rates exposure has caused super-regional names to outperform this week, and it’s just harder to see much upside from here,” Baird analyst David George said. “The risk/reward trade-off in the banking group is becoming somewhat unattractive,” he added.

Either way, it won’t be long before the rally faces its next major hurdle. Wells Fargo & Co., JPMorgan Chase & Co. and Citigroup Inc. are set to kick off the fourth quarter earnings season next Friday as the group seeks to build on a largely positive set of third quarter results, despite continued weakness in earnings. growth loans.

While most analysts agree that banks will meet expectations for accelerating loan growth, the spread of the omicron variant will test consumer and investment demand.

“Loan growth in the first quarter could be slowed by the impact of the Omicron variant, but we expect growth to resume an upward trajectory throughout 2022,” according to the Wedbush analyst, David Chiaverini.

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