By Jacob Sonenshine
Bank stocks are looking like a steal right now, especially as they benefit from -- not buckle under -- artificial intelligence.
The State Street SPDR S&P Bank exchange-traded fund, which holds the largest investment banks and many lenders throughout the country, is down 12% from its 2026 high, worse than the S&P 500's 3% fall from this year's peak.
But considering that banks are boasting increased efficiency from AI and strong earnings outlooks, the stocks' cheaper valuations are only an opportunity.
The Bank ETF fund trades at just under 10 times expected earnings for the coming 12 months, near the low end of its range for the past couple of years. The S&P 500, in comparison, trades around 21 times. Bank multiples can plunge during stressful times for the financial sector or the economy, but they can rise into the teens when everything is humming along just fine -- and that's a distinct possibility.
Banks have a lot to gain if current headwinds -- namely the war in Iran and AI -- subside, and they absolutely can. Good news on Iran or from earnings, especially on the margin front, can easily spark gains because these stocks look like bargains.
In the case of the U.S. military action in Iran, bank stocks have suffered from concerns that spiking oil prices could bring about the possibility of stronger inflation. Further inflation would hurt economic demand, as well as banks' bread and butter: loan volumes, corporate transaction volumes, and financial market activity.
While the Iran situation is certainly complicated, President Donald Trump has already said -- after stocks dropped -- that he'd rather not wage war against Iran for an extended period, yet another example of 'TACO. ' That reduces the probability of an extended oil supply disruption, and already, oil futures contracts are down aggressively from their recent peaks. This calming of tensions and drop in oil prices can lift stocks, especially economically-sensitive ones like banks.
Before the Iran conflict, the market feared that new AI tools from innovative private companies could severely disrupt the financial services that banks offer. But those worries likely are overblown.
Many financial institutions will emerge unscathed by AI. For instance, dealmaking for mergers and acquisitions will require human negotiation for the foreseeable future. Lending can benefit from AI's ability to identify borrowers and set interest rates for given risk levels, but it's unlikely that massive amounts of loans will come from tech companies versus the largest banks.
In fact, the largest financial institutions are using AI tools to become more efficient at these activities, including lending. Look no further than JPMorgan Chase & Co., which said on a late February business update that it had identified north of $600 million of cost efficiencies, including using AI across various businesses.
Most important, banks are positioned to grow earnings aggressively. Aggregate revenue for the bank ETF is expected to grow almost 9% annually through 2027, according to FactSet. Growth is expected to come from resurgent M&A activity, strong-enough loan demand in a moderately-growing economy, and rising stock prices -- key for asset management revenue. With fatter profit margins from AI, earnings can grow 14% annually through 2027.
Even smaller investment banks look interesting as well. Shares of Moelis & Co., Evercore, Houlihan Lokey, and Lazard are all down more than 20% from this year's peaks and are trading at significantly lower multiples. They are expected to grow earnings, and those earnings estimates have remained fairly stable since the start of the year, even amid a more volatile economic backdrop.
Overall, banks' margin expansion could become evident as soon as second-quarter earnings reports in April.
A major potential catalyst for bank shares is "increased evidence that the banks are implementing AI productivity," writes Trivariate Research's Adam Parker. He maintains an overweight sector recommendation for financials, although a bit more cautiously.
The next round of earnings reports could -- hopefully -- go a long way in vindicating his current bullish thesis on banks, and ours.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
March 10, 2026 16:14 ET (20:14 GMT)
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