Bank ETFs extend big rally spurred by Fed as U.S. stock market rises to new peaks

By Christine Idzelis

The Fed's messaging on Wednesday was "positive for bank stocks," says BofA Global Research

Exchange-traded funds that buy U.S. bank stocks rose sharply Thursday, extending their big gains notched on the back of the Federal Reserve's policy meeting.

Shares of the SPDR S&P Regional Banking ETF KRE closed 1.5% higher, building on their 3.1% rally on Wednesday, the day the Fed projected that it still expects three interest-rate cuts in 2024. But the fund, which tracks an equal-weighted index of U.S. regional banking stocks, remains down 5.5% so far this year.

The SPDR S&P Bank ETF KBE, which more broadly tracks an equal-weighted index of U.S. bank stocks, also gained about 1.5% Thursday, after its shares jumped around 3% Wednesday. The ETF is barely in positive territory in 2024, up just 0.6% year to date, FactSet data show.

The Fed's messaging on rate cuts and quantitative tightening, or QT, are "conducive for bank stock outperformance into first-quarter earnings results due out in mid-April," according to a BofA Global Research note Thursday. Under QT, the Fed has been allowing its holdings of Treasury and mortgage-backed securities to roll off its balance sheet each month.

The retention of three rate cuts of a quarter-percentage point each in the Fed's "dot plot for 2024 and the repeated reference of 'fairly soon' when discussing the timing of QT taper were both positive for bank stocks," BofA analysts said in the research note. "Increased confidence for easing monetary policy could cause markets to dial-back the probability of tail risk events, while increasing the odds for a 1995 'soft landing scenario' for bank stocks."

The SPDR S&P Bank ETF and SPDR S&P Regional Banking ETF are each lagging the U.S. stock market so far this year.

Regional bank stocks, in particular, have broadly struggled to recover from their fall after the sudden failure of Silicon Valley Bank in March 2023.

The SPDR S&P Regional Banking ETF's holdings include firms such as New York Community Bancorp Inc. (NYCB), Western Alliance Bancorp (WAL), Webster Financial Corp. (WBS) , First Horizon Corp. (FHN) and Citizens Financial Group Inc. (CFG), according to data as of March 20 on the website of State Street Global Advisors.

New York Community Bancorp recently got a $1 billion equity investment led by Liberty Strategic Capital after a plunge in its share price.

Meanwhile, the iShares U.S. Regional Banks ETF IAT, which tracks an index of small- and mid-cap regional banks, is up around 1.7% this year through Thursday.

Big Wall Street banks

Shares of major Wall Street banks including JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Goldman Sachs Group Inc. (GS), Morgan Stanley (MS), Citigroup Inc. (C) and Wells Fargo & Co. (WFC) all rose Thursday.

All six of those banks are held by the Invesco KBW Bank ETF KBWB, which tracks a modified market-capitalization weighted index of U.S. banking stocks, as recently as March 19, according to data on Invesco's website.

Goldman, which has a market value of around $129 billion, was among the S&P 500's top-performing stocks on Thursday, FactSet data show. Shares of Goldman closed with a gain of more than 4%.

Shares of the Invesco KBW Bank ETF have climbed more than 7% so far this year, beating the small gain of the SPDR S&P Bank ETF by a wide margin, according to FactSet data.

The broader U.S. stock market rose Thursday, with the S&P 500 SPX finishing 0.3% higher, the Dow Jones Industrial Average DJIA increasing 0.7% and the Nasdaq Composite COMP edging up 0.2%. All three indexes logged fresh record closing peaks, after each notching all-time highs Wednesday.

So far this year, the S&P 500 has climbed almost 10%, FactSet data show.

-Christine Idzelis

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03-21-24 1744ET

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