Bank Stocks Are Near Record Highs. What They Need to Break Them. — Barrons.com

By Jacob Sonenshine

Bank stocks are coming close to breaking out to record highs, but they need one of a couple factors to turn their way.

Banks have had a middling year. The State Street SPDR S&P Bank exchange-traded fund is up 10% this year, underperforming the S&P 500's 17% gain. For the moment, it's having trouble catching up to the market and breaking out to new highs.

But look closer, and at just over $60, the ETF is trading near its record high of $62.76, hit in November. That level wasn't enough above its 2007 record high of $60.41 to qualify as a "breakout." Overall, the low-$60s is where sellers have come in consistently to knock the price lower — and that hasn't changed quite yet.

If the price rises more convincingly above the low $60s, however, it would signal that a wave of new buying pressure has come in. That means something has changed for the better for banks and that the stocks would look more promising going forward.

Friday wasn't the breakout day — and for good reason. Friday's release of the Personal Consumption Expenditure Index, the Federal Reserve's preferred metric for inflation, wasn't quite low enough. The September PCE rose 2.8% year over year, in line with estimates, but above August's 2.7%, and well above the Fed's 2% target. While the Fed is almost certain to cut rates at its December meeting next week, higher inflation could mean fewer cuts, but lower-long-term yields of investors become concerned about economic growth.

Higher short-term rates and lower long-term yields is never what banks want. They borrow short-term to lend for the long-term, and a flattening yield curve, as this is known, raises their funding costs, pressures their interest income, and reduces their profit margins and earnings.

The issue is especially pressing for pure lenders that aren't investment banks, such as Truist Financial, PNC Financial, Fifth Third Bancorp and M&T Bancorp, which are all still trying to reclaim highs. These banks' earnings are highly sensitive to interest rates because much of their profit comes from lending. Weaker inflation would certainly help their case.

Bank stocks could also get a boost when they report earnings starting in January. If the results surpass expectations and management teams outline a path for stable lending activity, profitability, and cash returns in the form of dividends and share repurchases, these stocks can move higher.

Don't bet against it. Since November 2024, the bank ETF has been on an upward journey to reclaim the low-60's level. It's now been holding around this area for weeks.

"Now they are breaking out again, setting up to enter 2026 as leadership, " writes Kevin Demeter, technical analyst at Renaissance Macro Research. "We would be overweight the banks heading into 2026."

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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