The outlook for bank stocks can't get much worse, and that's exactly why they look appealing.

The State Street SPDR S&P Bank ETF, home to investment banks and other lenders, has fallen 12% to $63 from an August record high of just over $71.

Concerns about future earnings are to blame for the exchange-traded fund's drop. One reason for those worries is the Federal Reserve's September interest-rate increase. Essentially, banks' short-term borrowing costs have risen as a result, cutting into their profitability.

Also, Bank of America CEO Brian Moynihan said earlier this month that third-quarter trading revenue would come in fairly flat year over year, and that investment banking revenue might also disappoint.

But the picture could turn around for banks. There is plenty of potential for a sector rally if banks offer good-enough earnings outlooks, especially because banks are trading at lower price-to-earnings multiples than before the selling that began in August. The bank ETF now trades at just over 10 times earnings, nearly half the S&P 500's multiple of just over 19 times.

"What's happening with financials and banks in particular seems a bit much all at once," writes the co-founder of Talaria Capital Management, Christopher Shaffer, who favors financials in the event that the Fed doesn't raise rates many more times.

And the central bank might not have to. The rate of inflation could moderate next year if the effect of high oil prices wears off and crude doesn't break out above its high. Either way, an aggressive series of rate increases from the Fed isn't a given.

That would be good news for the "yield curve," which has weighed on bank stocks lately. The curve has flattened, as short-term Treasury yields have risen faster than long-term yields. That makes lending less profitable, given that banks borrow short-term money.

Lower-than-expected short-term rates and a steeper yield curve would send bank stocks back toward their highs. This scenario could play out early next year if inflation data look less scary, or if Fed Chair Kevin Warsh speaks less hawkishly in December.

"The Warsh Fed does not need to restart an extended hiking cycle," writes Shaffer.

Another potential catalyst for bank stocks is earnings reports from JPMorgan Chase and Goldman Sachs in October.

"The upcoming reporting season, kicking off with JPM on 10/13 will be particularly important for financials commentaries, share price reaction," writes Evercore strategist Julian Emanuel.

Those share price reactions could be positive. With bank investors already preparing for potentially weaker investment banking and trading figures, stocks across the industry could bounce with any strong-enough results. Those two big-name banks' reports, in particular, could send many of these stocks higher if they beat earnings estimates. JPMorgan hasn't missed earnings estimates since 2022 and Goldman hasn't missed since 2023, according to FactSet.

Such catalysts could lift the stocks, given that investors have already gotten rid of so many shares. A Deutsche Bank survey shows portfolio managers' positioning in financial stocks is below its long-term median and near where it tends to bottom (aside from crises and other market shocks). Absent some type of crisis, investors are probably finished dumping bank stocks, and will be likely to take some more risk by buying the sector if earnings look fine.

For the long term, banks have lots of earnings growth potential. A growing economy-even at a slower pace than recently-means more loans, more buoyant markets, and increased trading activity, and dealmaking. The kicker is that profit margins could increase, as revenue grows and banks rapidly take up artificial intelligence, helping them cut costs. Analysts expect 12% annual earnings per share growth, in aggregate, for the bank ETF through 2028.

Those bullish on the group shouldn't wait too long to buy-earnings are just around the corner.