Hedge funds are buying up shares of major U.S. banks. Will the frenzy continue?

Hedge funds are buying shares of the largest US banks at the highest rate in a decade. The interest is fueled by hopes for lower interest rates by the Federal Reserve, easing of banking regulations and the stability of the sector as a whole, which it has demonstrated even after all the Fed stress tests. Analysts are positive about the sector's prospects, but some still warn investors that expectations are too high.

Last week hedge funds sharply increased purchases of bank shares: the volume of net purchases (volume of purchases minus volume of sales) reached the maximum for almost a decade,  reports Bloomberg with reference to data from the brokerage division of Goldman Sachs. Against this background, on Monday, June 30, the financial sector index of the S&P 500 set a new historical record.

«We're seeing a lot of upside interest in bank stocks, fueled by deregulation expectations and low projected volatility in the sector,» Daniel Kirsch, head of options at Piper Sandler, said in a Bloomberg statement.

Many market participants were counting on a similar growth of quotations in the sector since November: the re-election of Donald Trump as U.S. president has strengthened expectations of deregulation of banks and the course to support business, Bloomberg writes. The sector's position temporarily weakened in April when Trump launched a trade war. But since then, the KBW Bank Index, which tracks the largest U.S. lending institutions, has risen more than 30%, though it remains 5.4% below its 2022 peak.

Analysts and traders positively estimate prospects of banking sector, emphasizes Bloomberg. Thus, UBS named its portfolio of shares of large banks as one of the priority instruments for betting on the general growth of the market. Wells Fargo lead analyst Mike Mayo and Bank of America specialists also expect the rally to continue. BofA analysts led by Ebrahim Poonawala added that successful passage of the Fed's stress tests by banks will be a major growth driver for the sector.

In addition, analysts expect additional positive factors that will support the industry. For example, lower capital and leverage requirements. «This could be a big change - if you relax the capital ratios that banks have to hold on their balance sheets, lending will become more favorable, and that could encourage them to make more loans,» Gerard Cassidy, head of bank equity strategy at RBC Capital Markets, said in a Bloomberg statement. He called the U.S. financial sector his favorite sector and expects regulatory easing in the second half of 2025 to allow banks to manage their loan portfolios more aggressively by the end of that and into 2026.

The Fed is also expected to ease monetary policy. While typically high rates are good for banks, lowering them this year could help the economy and help boost transactions, Bloomberg explained. Cassidy expects that as the deadline to renegotiate fixed loans made during the pandemic at ultra-low interest rates approaches, banks will be able to set more favorable terms for them. «Right now, banks are getting higher yields on their assets while borrowing costs are coming down,» he noted.

However, not everything is so smooth, warned Bloomberg. Although the sector has shown profit growth for nine consecutive quarters, the financial sector is not expected to grow in the current reporting season: the indicators are likely to remain at the same level, the agency reports. JPMorgan, Citigroup and Wells Fargo will open the season of quarterly reports on July 15.

Baird analyst David George advised investors to stay away from JPMorgan and Bank of America shares in a June 27 note in a note. He downgraded JPMorgan to «below market,» and his $235 target price for the bank's stock suggests it will fall nearly 20% from its June 30 closing level. For Bank of America, the analyst downgraded the rating to Neutral, and his target price of $52 implies a nearly 10% decline from the last closing price.

George acknowledged the optimism around large-cap banks and their advantages, but added that he thinks BofA stock is already fairly valued, and JPMorgan even has a little downside given that it's trading at record multiples.

«We recognize that we are going against the market trend, and we recognize that JPMorgan is an outstanding franchise with dominant positions in every line of business and a really strong balance sheet,» George said. - But expectations for the bank are excessively high right now.»

This article was AI-translated and verified by a human editor