Why bank stocks don't need 'rotation out of tech' to keep rising after July jump

MW Why bank stocks don't need 'rotation out of tech' to keep rising after July jump

By Christine Idzelis

'While we think tech stocks will return to the front of the pack before long, we think bank stocks may fare better than many over the rest of the year,' says Capital Economics

Bank stocks are on a tear in July - and it's a rally with legs beyond the recent rotation out of Big Tech stocks, according to Capital Economics.

"There are a number of factors supporting the recent rally in U.S. bank shares, not just the rotation out of tech stocks," said James Reilly, markets economist at Capital Economics, in a note dated July 23. "We doubt this rotation is here to stay, we think bank stocks will recover further ground on other 'non-tech' sectors."

Shares of exchange-traded funds that hold bank stocks have posted double-digit percentage gains so far this month, exceeding the broader U.S. stock market's climb. Bank shares have gotten a lift from a "successful" second-quarter earnings season, while the recent steepening of the U.S. Treasury market's yield curve "probably strengthened their appeal," according to Reilly.

The SPDR S&P Bank ETF KBE has soared 15.4% in July through Tuesday, while the SPDR S&P Regional Banking ETF KRE saw an even bigger surge of 17.8% over the same period, according to FactSet data. By contrast, the S&P 500 SPX rose 1.7% during that stretch.

Banks may benefit from the recent steepening of the Treasury yield curve-which resulted from short-term yields falling faster than longer-term ones-because of their "borrow short, lend long" model, according to Capital Economics. Although the yield curve recently steepened, it remains inverted, with the short-term rates above long-term Treasury yields.

The yield on the 10-year Treasury note BX:TMUBMUSD10Ywas trading around 4.23% on Wednesday morning, while the two-year Treasury rate BX:TMUBMUSD02Ywas at 4.39%, according to FactSet data, at last check.

"We expect the 2s10s Treasury curve to steepen further," narrowing the gap between the two-year and 10-year rates to zero by year-end, said Reilly.

Capital Economics expects the U.S. economy will see lackluster growth this year, but not a recession, according to his note.

"We don't envisage a need for a much larger rise in loan-loss provisions, and we suspect banks will meet or surpass earnings expectations," said Reilly.

Despite Capital Economics anticipating more distress in commercial real estate this year, "we don't think a widespread crisis is brewing," he said. "We don't think there will be major renewed concerns over regional banks' exposures in this area."

Shares of the SPDR S&P Regional Banking ETF are up 10.3% this year through Tuesday, according to FactSet data. The SPDR S&P Bank ETF climbed 16.3% over that period, compared with the S&P 500's gain of 16.5% in 2024 through that same date.

"U.S. bank shares still appear relatively low," said Reilly. "While we think tech stocks will return to the front of the pack before long, we think bank stocks may fare better than many over the rest of the year."

Big Tech stocks have struggled this month, with Facebook parent Meta Platforms Inc. (META), Nvidia Corp. $(NVDA)$, Amazon.com Inc. $(AMZN)$, Google parent Alphabet Inc. $(GOOGL)$ and Microsoft Corp. $(MSFT)$ in the red for July based on Wednesday morning trading.

The U.S. stock market was trading down Wednesday, with the S&P 500 falling 1.5%, the Dow Jones Industrial Average DJIA sliding 0.9% and the technology-heavy Nasdaq Composite COMP dropping 2.2%, according to FactSet data, at last check. The SPDR S&P Bank ETF and SPDR S&P Regional Banking ETF had smaller declines Wednesday morning, each down around 0.7%.

-Christine Idzelis

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July 24, 2024 11:30 ET (15:30 GMT)

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