Shares of major U.S. financial stocks, as represented by the Financial Select Sector SPDR Fund (NYSE: XLF), surged to record highs, in the wake of the March Federal Open Market Committee (FOMC) meeting.
This rally was fueled by anticipations of stronger economic growth and a reduction in borrowing costs, potentially boosting loan demands for U.S. banks.
Equity analyst Ebrahim H. Poonawala from Bank of America highlighted the market's optimistic outlook in a note on Thursday, noting the Fed's projection of three 25 basis point rate cuts in 2024 and its "fairly soon" reference to the commencement of the quantitative tightening (QT) taper represent bullish signals for bank stocks.
Following the FOMC's latest meeting and comments by Fed Chair Jerome Powell, regional bank stocks, as indicated by the SPDR Regional Banking ETF (NYSE: KRE), witnessed a sharp increase of over 4%, and surged by a further 3% on Thursday's morning trading.
A Shift In Market Sentiment: Toward A 1995 Scenario?
Poonawala's analysis suggests that the increased confidence in a more lenient monetary policy has led markets to reassess the likelihood of tail risk events negatively impacting the economy.
Instead, there's a growing belief of "a 1995 soft landing scenario for bank stocks," where the sector could experience significant growth.
Reflecting on history, the analysis recalled the year 1995, when bank stocks soared by 54% following a pause in Federal Reserve rate hikes, significantly outperforming the S&P 500's 34% gain.
Bank of America's Bullish Outlook On Major Banks
The report further emphasized Bank of America's continued positive stance on leading financial institutions such as Goldman Sachs Inc. (NYSE: GS) and Morgan Stanley (NYSE: MS), propelled by the expectation of an upturn in capital market activities.
This optimistic view was reinforced by the stellar debut of Astera Labs Inc. (NASDAQ: ALAB) and the high-end pricing of Reddit's IPO, suggesting a favorable risk/reward scenario for Goldman Sachs and Morgan Stanley.
Potential For 'Super-Regional Banks' To Narrow The Gap Versus Major Players
Despite potential challenges such as increasing regulatory pressures and commercial real estate concerns, there appears to be room for regional banks to reduce the valuation gap with their Global Systemically Important Banks (GSIB) counterparts.
Bank of America highlighted that super-regional banks - an elite group represented by U.S. Bancorp (NYSE: USB), Truist Financial Corp. (NYSE: TFC), Western Alliance Bancorporation (NYSE: WAL), Synovus Financial Corp. (NYSE: SNV), F.N.B. Corp. (NYSE: FNB), First Bancorp (NYSE: FBP) - are trading at an 8% discount relative to GSIBs, a notable shift from their historical 14% premium.
Goldman Sachs Is Bullish On First Citizens Bancshares
In a related analysis, Goldman Sachs equity analyst Ryan M. Nash initiated coverage on First Citizens Bancshares Inc. (NASDAQ: FNCNA) with a Buy rating and a $1,950 price target.
Described as a leading regional bank, First Citizens Bancshares is well-positioned to return more than 20% of its market capitalization to shareholders through buybacks in the near term. Despite concerns over credit impairments linked to commercial real estate.
Nash believes that the bank's reserves are sufficient and anticipates an improvement in potential losses over time.