Key points
- Lower interest rates generally benefit bank stocks, but not all stocks are equal in this sector.
- Commercial banks have an advantage over investment banks this cycle based on their balance sheets.
- Markets are willing to pay the price of two bank names, expecting higher prices.
- 5 stocks we like better than the iShares 20+ Year Treasury Bond ETF
Each cycle brings new opportunities; Now that the Federal Reserve (Fed) is considering cutting interest rates in 2024, the market may be preparing to move in a new direction. Bank stocks could be the first to act, because they are linked to the financial pulse of the economy.
However, not all banking stocks are equal. There are investment banks and commercial banks. In this new interest cycle, the market is hinting at the banking sector which is expected to outperform the rest of the market. financial sector. Building on fundamentals, investors may take a closer look at the coming wave.
Initially, hybrid banks (investment and commercial) like JP Morgan Chase & Co. NYSE:JPM And Northern Trust Company. NASDAQ:NTRS are the type of institutions that the market is looking to buy, regardless of price. Paying too much for potential future returns is a trend in these stocks that starts here.
Why banks for lower rates?
Traders are betting that the Fed will cut interest rates by May or June 2024, a trend that investors can follow throughout the year. FedWatch tool proposed by the CME Group inc. NASDAQ:CME. Because markets move well before the trend manifests itself, JP Morgan stock is now flirting with new all-time highs.
However, there is still a long way to go, which means investors could continue their momentum. Northern Trust shares cross their 52-week highs but has yet to regain its 2022 high of $135 per share.
Northern offers a different opportunity to those looking for a dip buying opportunity than JP Morgan’s momentum. Northern Trust’s advantage comes from its $49 billion in debt securitiesusually composed of government bonds such as 10-year Treasury notes.
JP Morgan also owns some of these assets on its balance sheet, but market enthusiasm could come from the bank’s exposure to investment banking activities. Lower interest rates typically trigger mergers and acquisitions (M&A) activity, which earns these banks a good portion of fees and revenues.
Lower interest rates set by the Fed affect bond interest rates, and when rates fall, bond prices rise. Knowing this, investors may want to gain exposure to banks like Northern Trust, whose assets are primarily bonds and loans. If Northern Trust’s book value increased (due to more valuable bonds), its stock price could follow.
For JP Morgan, the thesis could be rooted in the expectation of higher earnings per share (EPS) from its heating investment banking departments. In fact, analysts Wells Fargo & Co. NYSE:WFC have increased their price targets so that the bank $220 per share from March 2024, calling for an 11% increase from current prices.
The market has voted
The financial sector, focused on commercial banking sector, currently trades at a price-to-earnings (P/E) valuation of 9.8x. JP Morgan’s valuation is now 28% higher than the industry average, with the stock selling for 12.5x.
Northern Trust stock is valued 43% above the industry norm in its 14x P/E multiple. The market must have sufficient reason to pay a higher valuation for these names; Knowing how rates can affect these stocks, retail investors now have insight into what Wall Street is looking for.
By consolidating the momentum and downside opportunities of these stocks, investors can compare their performance over the past 12 months with that of SPDR funds for selected financial sectors NYSEARCA: XLF. JP Morgan stock outperformed the sector by as much as 23%.
In contrast, other banks like Goldman Sachs, more focused on investment banking activities, have underperformed these hybrid names. JP Morgan stock has trailed its rival by 26.2% over the past 12 months, showing investors how these fundamentals come into play.
Enough fuel to burn
With recent hot IPOs (IPO) as Reddit Inc. NYSE: RDDT, investors can assess the underlying fuel of the economic environment. M&A activity is also on the rise, as The Home Depot Inc. NYSE:HD also made a $18 billion acquisition last week.
These headlines don’t typically appear during times of economic stagnation, so these banking sector names could see a recovery in the coming quarter, fueled by economic momentum and hopes of lower interest rates.
Investors can track price action in bond-based exchange-traded funds (ETFs), such as iShares 20+ Year Treasury Bond ETF NASDAQ:TLT to track changes in bond yields and how those yields could affect bank stocks.
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