By Rebecca Ungarino

Shares of big U.S. banks are on pace for their biggest gains in five years, driven by a solid economy, falling interest rates, and investors' hopes for both a lighter touch from regulators and increased merger activity under President-elect Donald Trump.

Improving outlooks for several large lenders that have lagged behind their rivals in recent years, such as Wells Fargo and Citigroup, have contributed to that performance, but the strength of the broader market has contributed as well. The S&P 500 has set 57 record highs this year.

"Investor interest in the group appears to be at multiyear highs, although our sense is there remains room for investor weightings in the space to increase, underpinning our positive outlook," D.A. Davidson financial sector analysts wrote in a report to clients this month.

The S&P 500 Banks Industry Group Index, which includes Wells, Citi, JPMorgan Chase, and large regional lenders such as Fifth Third Bancorp, has risen 35.5% in 2024, its best performance since 2019. The SPDR S&P Bank ETF is up 21% while the Financial Select Sector SPDR ETF has gained 30%. Both are on track for their biggest yearly gains since 2021.

Gerard Cassidy, co-head of global financials research at RBC Capital Markets, wrote to clients that he expects the picture for banks to improve. He says that is thanks to the likelihood of a steeper yield curve, tepid loan growth accelerating -- led by lending to businesses -- M&A activity picking up, and regulatory easing.

As Cassidy and other longtime bank watchers have noted, the risks to that broadly shared thesis and the unknowns are numerous. Hopes and expectations that many bank sector investors have for widespread deregulation are, for now, just that -- hopes and expectations.

The candidates selected by Trump to lead the Securities and Exchange Commission, the Treasury Department, and the Federal Trade Commission are generally viewed as having friendlier postures toward financial firms' activities than their predecessors. Yet those picks have not outlined their plans, and their agendas could bring less satisfaction for investors than they're counting on.

A tangle of other factors, from the possibility of re-emerging inflation and threats of new tariffs, could also unsettle the market, crimp consumer spending, and set back bank performance.

Still, Wall Street's view on banks' health is bullish. Morgan Stanley equity analysts have been calling for a rebound in capital markets as a boon for big banks. They now expect investment bank revenues to surpass the highs of 2021 -- a banner year for deal volume -- by 2026.

Write to Rebecca Ungarino at rebecca.ungarino@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.

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December 27, 2024 14:25 ET (19:25 GMT)

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