MW Here's why this is a golden age for banks - but some their stocks may be too high
By Philip van Doorn
While there are three exceptions among the 20 largest banks, most big bank stocks appear fully valued, based on analysts' price targets
Bank-earnings season will begin on Tuesday, and dedicated industry investors are enjoying what can only be called the best of times. And an easing regulatory environment and the prospect of further interest-rate cuts by the Federal Reserve could set up another period of improvement for U.S. banks - especially the largest ones.
JPMorgan Chase & Co. (JPM), Citigroup Inc. (C) and Wells Fargo & Co. (WFC) will announce their second-quarter results Tuesday morning before the market opens. Bank of America Corp. $(BAC.SI)$, Goldman Sachs Group Inc. (GS), and Morgan Stanley (MS) will report on Wednesday to round out the largest six U.S. banks by total assets. Most large regional banks will report their results within the next two weeks.
Read: JPMorgan Chase, Citi and Goldman rallies under scrutiny as earnings updates await
The bond market is pointing to what potentially could be a boon for banks' net interest margins - the spread between what they pay for deposits and borrowings and what they earn on loans and investments. Early Monday, the yield on 3-year U.S. Treasury notes BX:TMUBMUSD03M was 4.34%, only slightly below the 4.42% yield on 10-year Treasury notes BX:TMUBMUSD10Y. The flat yield curve indicates long-term bond investors are locking in yields as they anticipate cuts to the federal-funds rate. That is the short-term rate on which banks' deposit rates are based. A cut or two to the federal-funds rate can quickly translate to profitability improvements, as many banks' balance sheets are positioned so that their deposits reprice quicker than their loan portfolios.
In the "higher for longer" interest-rate environment, with the Fed not cutting as quickly as some investors may have expected, Oppenheimer analyst Chris Kotowski expects "repricing of low-coupon securities and other assets," which include commercial loans, also to help improve banks' interest margins.
In a note to clients on June 20, Kotowski also wrote that "in relatively stable and boring environments, banks' general tendency [is] to do a good job of eking out efficiency improvements."
Big banks lead
Check out how the 11 sectors of the S&P 500 SPX have performed over the past year:
Sector or index 1-year return Financials 25.5% Industrials 23.5% Utilities 20.1% Communication Services 19.8% Consumer Discretionary 16.9% Information Technology 13.1% Consumer Staples 10.4% Real Estate 8.3% Materials 3.7% Energy 2.2% Healthcare -6.7% S&P 500 13.6% Source: FactSet
All returns in this article include reinvested dividends.
The financial sector has been the best performer among the 11 sectors of the large-cap U.S. benchmark index.
Let's take a narrower look at the banks. This chart shows one-year returns for the KBW Nasdaq Bank Index BKX of 24 large-cap banks and the KBW Nasdaq Regional Banking Index XX:KRX, which includes 50 more banks:
According to Justin Menne, a portfolio manager at Harbor Capital Advisors in Chicago, the largest banks have been outperforming because of improving profitability, "while we have not seen similar improvements for medium-sized or regional banks."
"You have seen multiples expand for large banks but not for regional banks," Menne told MarketWatch.
He was referring to forward price/earnings multiples, which are stock prices divided by consensus earnings estimates. For sectors and broad indexes, these valuations are weighted by market capitalization.
Here's a comparison of forward P/E ratios and their current levels relative to historical levels for banking industry groups within the S&P 500, the S&P MidCap 400 MID and the S&P Small Cap 600 Index SML:
Industry group Forward P/E Forward P/E to 5-year average Forward P/E to 10-year average S&P 500 Banks 12.9 116% 115% S&P Mid Cap 400 Banks 11.7 105% 93% S&P Small Cap 600 Banks 12.0 101% 92% Source: FactSet
These are weighted forward P/E ratios based on rolling consensus 12-month earnings-per-share estimates among analysts polled by FactSet.
FactSet's S&P 500 banking industry group includes the largest four U.S. banks by total assets (JPMorgan Chase, Citigroup, Bank of America and Wells Fargo) but excludes Goldman Sachs and Morgan Stanley, which are mainly investment banks and asset managers. It also excludes American Express Co. $(AXP.AU)$, which trades at a relatively high P/E multiple of 19.9, reflecting its high returns on equity from fee-based card and travel services and high interest rates on credit-card balances.
But the table shows that the largest banks are trading high relative to their long-term average P/E ratios, while the midsize banks' valuations are discounted to their 10-year averages.
"Our expectations are for profitability to remain higher for larger banks, so we expect to see higher multiples there," Menne said.
"The stress tests have implied that capital requirements for the largest banks are likely to be a bit lower than they were," he added.
The Federal Reserve's annual stress tests were completed last month and were followed by a slew of dividend increases by the largest banks. Here is how big U.S. banks have compounded their dividends over the past five years.
But Menne pointed to another potential catalyst for midsize and regional banks: "As soon as you see some clarity on where tariff rates will end up, that may remove some of the potential overhang" for potential merger activity for U.S. banks, he said. But he also said a settling of tariff policy could also boost new loan volumes, "to the extent that executives at business are holding back on spending plans because of concerns over trade."
Are the bank stocks already fully valued?
The answer to this question may depend on your own investment outlook. Some investors or traders are looking for quick gains on stocks they consider to be undervalued. Others wish to hold for long periods to let earnings dividends compound for long-term growth.
One way to invest broadly in the less expensive midsize banks is to hold shares of either the Invesco KBW Regional Banking ETF KBWR, which has all 50 stocks in the KBW Nasdaq Regional Banking Index in its portfolio, or the iShares U.S. Regional Banks ETF IAT, which holds stocks as it tracks the Dow Jones U.S. Select Regional Banks Index.
For individual stocks, sell-side analysts (those working for brokerage firms or research firms that supply information to the brokers) typically set 12-month price targets. That is a short period for some investors. But by the 12-month targets, it would appear most of the largest 20 U.S. banks are fully valued. Here's a summary of ratings and price targets:
Largest 20 U.S. Banks Ticker Share "buy" ratings 12-month upside potential implied by price target July 11 price Cons. Price target Total assets ($billions) JPMorgan Chase & Co. JPM 57% 4% $288.19 $299.14 $4,358 $Bank of America Corp(BAC-N)$. BAC 77% 13% $46.97 $52.91 $3,349 Citigroup Inc. C 75% 10% $87.08 $95.79 $2,572 Wells Fargo & Co. WFC 67% 5% $82.36 $86.68 $1,950 Goldman Sachs Group Inc. GS 46% -5% $709.12 $676.20 $1,766 Morgan Stanley MS 31% -2% $143.09 $139.81 $1,300 U.S. Bancorp USB 58% 11% $47.57 $52.65 $676 PNC Financial Services Group Inc. PNC 64% 6% $197.95 $210.13 $555 Truist Financial Corp. TFC 46% 4% $45.50 $47.35 $536 $Capital One Financial Corp(COF-N)$. COF 76% 8% $220.74 $238.40 $494 Charles Schwab Corp. SCHW 83% 3% $93.04 $96.05 $463 Bank of New York Mellon Corp BK 61% 6% $93.66 $99.50 $441 State Street Corp. STT 50% 6% $110.21 $116.32 $373
MW Here's why this is a golden age for banks - but some their stocks may be too high
By Philip van Doorn
While there are three exceptions among the 20 largest banks, most big bank stocks appear fully valued, based on analysts' price targets
Bank-earnings season will begin on Tuesday, and dedicated industry investors are enjoying what can only be called the best of times. And an easing regulatory environment and the prospect of further interest-rate cuts by the Federal Reserve could set up another period of improvement for U.S. banks - especially the largest ones.
JPMorgan Chase & Co. (JPM), Citigroup Inc. (C) and Wells Fargo & Co. (WFC) will announce their second-quarter results Tuesday morning before the market opens. Bank of America Corp. (BAC), Goldman Sachs Group Inc. (GS), and Morgan Stanley (MS) will report on Wednesday to round out the largest six U.S. banks by total assets. Most large regional banks will report their results within the next two weeks.
Read: JPMorgan Chase, Citi and Goldman rallies under scrutiny as earnings updates await
The bond market is pointing to what potentially could be a boon for banks' net interest margins - the spread between what they pay for deposits and borrowings and what they earn on loans and investments. Early Monday, the yield on 3-year U.S. Treasury notes BX:TMUBMUSD03M was 4.34%, only slightly below the 4.42% yield on 10-year Treasury notes BX:TMUBMUSD10Y. The flat yield curve indicates long-term bond investors are locking in yields as they anticipate cuts to the federal-funds rate. That is the short-term rate on which banks' deposit rates are based. A cut or two to the federal-funds rate can quickly translate to profitability improvements, as many banks' balance sheets are positioned so that their deposits reprice quicker than their loan portfolios.
In the "higher for longer" interest-rate environment, with the Fed not cutting as quickly as some investors may have expected, Oppenheimer analyst Chris Kotowski expects "repricing of low-coupon securities and other assets," which include commercial loans, also to help improve banks' interest margins.
In a note to clients on June 20, Kotowski also wrote that "in relatively stable and boring environments, banks' general tendency [is] to do a good job of eking out efficiency improvements."
Big banks lead
Check out how the 11 sectors of the S&P 500 SPX have performed over the past year:
Sector or index 1-year return
Financials 25.5%
Industrials 23.5%
Utilities 20.1%
Communication Services 19.8%
Consumer Discretionary 16.9%
Information Technology 13.1%
Consumer Staples 10.4%
Real Estate 8.3%
Materials 3.7%
Energy 2.2%
Healthcare -6.7%
S&P 500 13.6%
Source: FactSet
All returns in this article include reinvested dividends.
The financial sector has been the best performer among the 11 sectors of the large-cap U.S. benchmark index.
Let's take a narrower look at the banks. This chart shows one-year returns for the KBW Nasdaq Bank Index BKX of 24 large-cap banks and the KBW Nasdaq Regional Banking Index XX:KRX, which includes 50 more banks:
According to Justin Menne, a portfolio manager at Harbor Capital Advisors in Chicago, the largest banks have been outperforming because of improving profitability, "while we have not seen similar improvements for medium-sized or regional banks."
"You have seen multiples expand for large banks but not for regional banks," Menne told MarketWatch.
He was referring to forward price/earnings multiples, which are stock prices divided by consensus earnings estimates. For sectors and broad indexes, these valuations are weighted by market capitalization.
Here's a comparison of forward P/E ratios and their current levels relative to historical levels for banking industry groups within the S&P 500, the S&P MidCap 400 MID and the S&P Small Cap 600 Index SML:
Industry group Forward P/E Forward P/E to 5-year average Forward P/E to 10-year average
S&P 500 Banks 12.9 116% 115%
S&P Mid Cap 400 Banks 11.7 105% 93%
S&P Small Cap 600 Banks 12.0 101% 92%
Source: FactSet
These are weighted forward P/E ratios based on rolling consensus 12-month earnings-per-share estimates among analysts polled by FactSet.
FactSet's S&P 500 banking industry group includes the largest four U.S. banks by total assets (JPMorgan Chase, Citigroup, Bank of America and Wells Fargo) but excludes Goldman Sachs and Morgan Stanley, which are mainly investment banks and asset managers. It also excludes American Express Co. (AXP), which trades at a relatively high P/E multiple of 19.9, reflecting its high returns on equity from fee-based card and travel services and high interest rates on credit-card balances.
But the table shows that the largest banks are trading high relative to their long-term average P/E ratios, while the midsize banks' valuations are discounted to their 10-year averages.
"Our expectations are for profitability to remain higher for larger banks, so we expect to see higher multiples there," Menne said.
"The stress tests have implied that capital requirements for the largest banks are likely to be a bit lower than they were," he added.
The Federal Reserve's annual stress tests were completed last month and were followed by a slew of dividend increases by the largest banks. Here is how big U.S. banks have compounded their dividends over the past five years.
But Menne pointed to another potential catalyst for midsize and regional banks: "As soon as you see some clarity on where tariff rates will end up, that may remove some of the potential overhang" for potential merger activity for U.S. banks, he said. But he also said a settling of tariff policy could also boost new loan volumes, "to the extent that executives at business are holding back on spending plans because of concerns over trade."
Are the bank stocks already fully valued?
The answer to this question may depend on your own investment outlook. Some investors or traders are looking for quick gains on stocks they consider to be undervalued. Others wish to hold for long periods to let earnings dividends compound for long-term growth.
One way to invest broadly in the less expensive midsize banks is to hold shares of either the Invesco KBW Regional Banking ETF KBWR, which has all 50 stocks in the KBW Nasdaq Regional Banking Index in its portfolio, or the iShares U.S. Regional Banks ETF IAT, which holds stocks as it tracks the Dow Jones U.S. Select Regional Banks Index.
For individual stocks, sell-side analysts (those working for brokerage firms or research firms that supply information to the brokers) typically set 12-month price targets. That is a short period for some investors. But by the 12-month targets, it would appear most of the largest 20 U.S. banks are fully valued. Here's a summary of ratings and price targets:
Largest 20 U.S. Banks Ticker Share "buy" ratings 12-month upside potential implied by price target July 11 price Cons. Price target Total assets ($billions) JPMorgan Chase & Co. JPM 57% 4% $288.19 $299.14 $4,358 Bank of America Corp. BAC 77% 13% $46.97 $52.91 $3,349 Citigroup Inc. C 75% 10% $87.08 $95.79 $2,572 Wells Fargo & Co. WFC 67% 5% $82.36 $86.68 $1,950 Goldman Sachs Group Inc. GS 46% -5% $709.12 $676.20 $1,766 Morgan Stanley MS 31% -2% $143.09 $139.81 $1,300 U.S. Bancorp USB 58% 11% $47.57 $52.65 $676 PNC Financial Services Group Inc. PNC 64% 6% $197.95 $210.13 $555 Truist Financial Corp. TFC 46% 4% $45.50 $47.35 $536 Capital One Financial Corp. COF 76% 8% $220.74 $238.40 $494 Charles Schwab Corp. SCHW 83% 3% $93.04 $96.05 $463 Bank of New York Mellon Corp BK 61% 6% $93.66 $99.50 $441 State Street Corp. STT 50% 6% $110.21 $116.32 $373
(MORE TO FOLLOW) Dow Jones Newswires
July 14, 2025 08:28 ET (12:28 GMT)
MW Here's why this is a golden age for banks - -2-
American Express Co. AXP 38% -2% $325.24 $317.25 $282 Citizens Financial Group Inc. CFG 70% 7% $47.90 $51.23 $220 Fifth Third Bancorp FITB 65% 7% $44.05 $47.07 $213 M&T Bank Corp. MTB 59% 6% $204.05 $215.66 $210 Huntington Bancshares Inc. HBAN 75% 9% $17.56 $19.17 $210 Ally Financial Inc ALLY 64% 8% $40.52 $43.61 $193 KeyCorp KEY 54% 4% $18.49 $19.30 $189 Source: FactSet
Click on the tickers for more about each bank.
Read: Tomi Kilgore's detailed guide to the information available on the MarketWatch quote page
Among the largest 20 banks, the one whose stock has the highest upside potential based on consensus 12-month price targets is Bank of America. Banks on the list that also have majority "buy" or equivalent ratings and double-digit upside indicated by the price target include Citigroup and U.S. Bancorp. (USB) of Minneapolis.
The analysts as a group see Goldman and Morgan Stanley as fully valued. Both of these stocks have gotten ahead of the price targets and both have less than 50% "buy" ratings.
Steve Gelsi contributed.
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-Philip van Doorn
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July 14, 2025 08:28 ET (12:28 GMT)
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