Wall Street's survival depends on bank shares

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As Wall Street searches for a catalyst to halt the stock market slide, some strategists are looking to the banking sector for help.

"US bank stocks are the Achilles heel of the markets right now," Nicholas Colas, Co-Founder of stock market research firm DataTrek Research, said in a note to clients this week, YahooFinance reported.

"Bank stocks need to participate in any recovery rally to validate the idea that higher interest rates will not doom the US economy to recession next year. This is the group you need to be in if you believe strongly in the bull market."

American bank stocks, hit during the regional banking crisis in March, have lagged significantly behind the S&P 500 Index this year, even as they recovered from lows reached in May.

As of Thursday, the S&P Banks Index ETF and the S&P Local Banks Index ETF were down more than 20% and 30%, respectively, since the start of the year. The S&P 500 Index rose nearly 11% over the same period. US bank stocks lagged the markets by over 7% in both sector indices last month, even as the S&P 500 Index fell 5%.

In YahooFinance news, Charles Schwab's Chief Investment Strategist Liz Ann Sonders said that financial stocks are the missing ingredient for an effective rally from the bottom reached by the markets in October 2022.
Gerard Cassidy, RBC's analyst who monitors large banks, states that the rise of bank stocks will depend on the interest rate policy of the US Federal Reserve (FED). In Cassidy's view, if the Fed finishes raising rates now, bank shares will likely have bottomed out at the lowest valuations seen in decades. But if inflation picks up again and the Fed is forced to keep raising interest rates, bank stocks could be in more trouble.

"This is a bear market for banks," Cassidy said, noting the possibility of fewer rate hikes. It is not a consensus call at the moment and we are not calling for it. But this possibility is a serious risk for banks today," he warned.

The Fed's September projections suggested that an additional rate hike would be needed in 2023 before it starts cutting rates next year. As for buying into this possibility, Colas said that for the time being, for his part, he is in the more cautious camp on balances.

"If the bears of the markets are right and 'something is going to break' due to suddenly rising interest rates, that 'something' will surely include US banks," Colas said.
"If high yields cause a recession, credit losses will increase. If high yields damage the value of banks' bond portfolios, more capital sales may be required at more stressed prices. And of course these outcomes are not mutually exclusive."

Given this picture, bank balance sheets are becoming much more important for the markets. JPMorgan Chase, the largest bank in the US in terms of assets, is expected to announce its third quarter balance sheet on Friday next week.