The banking sector has diverged from the broader equity rally. While the State Street SPDR S&P 500 ETF (NYSE:SPY) is up about 14% for the year, the five largest U.S. banks, measured by the Invesco KBW Bank ETF (NASDAQ:KBWB), have collectively dipped around $270 billion from summer peaks.
Institutional investors have retreated – with only 35% expecting banks to beat the broader market, the Truist Securities survey showed, according to BigGo Finance. Compared with about 82% in December 2025, the decline reflects the repricing of bond yields.
Earnings season starts today, with JPMorgan Chase & Co. (NYSE:JPM), Goldman Sachs Group Inc. (NYSE:GS), Wells Fargo & Co. (NYSE:WFC), and Citigroup Inc. (NYSE:C) reporting before the market opens.
The Yield Shock
Net interest margin is the gap between what banks earn on their assets and what they pay to fund them. That margin is now under pressure. Since the Fed raised its benchmark rate in September, deposit and wholesale funding costs have climbed as lenders fight to hold on to cash.
“Loan growth is easier to find than deposit growth, and so it’s putting pressure on deposit dynamics of raising funds,” said Brendan Coughlin, president of Citizens Financial Group.
The 10-year Treasury yield is trading around 5.24%, and the 30-year around 5.55%. Higher rates make borrowing harder for corporate clients and increase the risk of trouble with floating-rate debt and commercial real estate loans coming up for renewal.
Not everyone sees a squeeze coming. “Banks are asset-sensitive still,” Matt Stucky, chief portfolio manager for equities at Northwestern Mutual, said according to MarketWatch.
Stucky notes that bank loans reprice faster than deposits. FactSet consensus shows net interest income rising across several big lenders, led by JPMorgan Chase, which is projected to grow 5.4% from the prior quarter and 12.2% from a year earlier.
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The Dealmaking Drag
After a blockbuster second quarter, profit expectations have been subdued. Space Exploration Technologies Corp.’s (NASDAQ:SPCX) record $85 billion IPO in June boosted that quarter.
Since then, high financing costs have slowed merger announcements. NVIDIA-backed Firmus Grid shelved its listing this week after investors pushed back on its valuation.
“A great deal of the recent underperformance for banks has been driven by the dramatic rise in long-term rates,” UBS analyst Erika Najarian told clients. Deutsche Bank research puts the specially serviced rate on securitized commercial real estate loans at 12%.
Others think the selloff has gone too far. Chris Grisanti of MAI Capital Management called the pullback “more of an opportunity than a harbinger of a downturn.” RBC Capital Markets‘ Gerard Cassidy said “underlying fundamentals remain strong” and the economy is “nowhere near a recession.”
“The No. 1 credit input is unemployment, which has been under 5% for 61 consecutive quarters,” said Macrae Sykes, portfolio manager of the actively-managed Gabelli Financial Services Opportunities ETF (NYSE:GABF).
Citigroup’s global co-head of M&A Guillermo Baygual sees demand holding up.
“Yes, the interest rate environment is not helpful, but as a topic in the boardroom, M&A hasn’t slowed down,” he said.
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