Bank stocks have been one of the best stocks in 2021, and analysts expect the industry to show continued strength as third-quarter results begin. The problem with bank stocks, however, is that they may have overheated.
The KBW bank index surged nearly 40% in 2021, more than double the 17% rise in the s & p 500. As investors keep buying lenders, there is growing expectation that the US economic recovery will spur the Fed to downsize and eventually start raising interest rates.
Matt O'Connor, an analyst at Deutsche Bank, wrote in a note to clients on Sept. 30: "given that most people believe that the overall macroeconomic outlook is good, and the prospect of higher interest rates and faster loan growth, it is difficult to be too negative to the banks."
That expectation reached its best after the FOMC's policy decision on September 22nd, when Jerome Powell, chairman, said the central bank might soon begin its long-awaited contraction, while the latest bitmap shows that nine out of 18 Fed officials expect to raise interest rates at least once by the end of next year. Since then, all 24 members of the KBW banking index have risen at least 4.6 per cent, of which 3/4 have risen by 10 per cent or more.
Despite the strong performance of banks in the first nine months of the year, the bullish outlook of many analysts has not been shaken, arguing that the current environment is suitable for these stocks to continue to grow. In September, analysts will put the entire Bank of America CorporationThe industry raised its holdings to increase, saying inflection points in loan growth, higher interest rates and reallocation of cash should boost earnings.
Royal Bank of CanadaGerald Cassidy, a capital markets analyst, expressed this view, saying that unless there is a double-dip recession, bank stocks should continue to rise next year. "investors who think the economy will continue to expand, especially if they address supply chain disruptions and rebuild inventories, should consider holding bank shares," he said.
Not everyone agrees with this view. In fact, the current debate on Wall Street is whether bank pricing is close to its peak.
"Big American banks have a lot of trading volume," said James Fotheringham, an analyst at BMO Capital Markets, who advises investors to seek profit-taking because JPMorgan Chase & CoAnd Bank of America Corporation's share price soared above the historical average.
Morgan StanleyShare prices have also come under fire recently after surging nearly 54 per cent in late August. The bank had a series of downgrades at the end of last month, and analysts at Oppenheimer and Bellenberg cited valuation concerns as the reason for the downgrade.