Investors are pushing bank stocks higher. Analysts are urging caution.

Investors pushed bank stocks higher last week, riding a stock market rally fueled by hopes that the Federal Reserve might be done raising interest rates and that a “soft landing” in the US economy was now possible.

Last Tuesday, after inflation data showed pricing pressure cooling quicker than expected, two major indexes that track the banking industry had their biggest single-day jumps since May 2020.

These same indexes – KBW Nasdaq US bank index (^BKX) and the KBW Nasdaq US regional bank index (^KRX) – are also on pace to show their best monthly returns in nearly three years. Both have surged roughly 13% since the beginning of November.

But analysts are not yet ready to declare that the worst is over for the industry, cautioning that many banks still face a litany of pressures that are expected to last well into 2024.

Regional banks are certainly on more stable ground than they were during the first half of the year, when the failures of Silicon Valley Bank, Signature Bank and First Republic triggered panic about the strength of many other mid-sized banks across the US.

The Silicon Valley Bank headquarters after the bank had been seized by regulators in March. REUTERS/Brittany Hosea-Small (Brittany Hosea-Small / reuters)

Yet their ability to earn more robust profits remains a challenge due to elevated interest rates and bond yields that mean more expensive deposits, higher paper losses on bonds held for investment and difficulties for borrowers.

New capital requirements proposed by US regulators threaten to make it even more difficult for some of these mid-sized banks to thrive in the future. Those rules, set to go into effect starting in 2025, are currently the subject of fierce debate in Washington.

Regional bank stocks have notably lagged the S&P 500 this year, even as they’ve recovered from the drubbing they took last spring. In fact, the KBW Nasdaq US bank index and the KBW Nasdaq US regional bank index are still trading at near-record low levels compared to the performance of the S&P 500.

The bull case for banks is that peak interest rates are now in the…


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