US Bank Stocks to Rise Amid Favorable Regulatory Shift and Dealmaking

As reported by Bloomberg on June 26, the financial sector is entering a period of transition. The Fed’s upcoming stress test results, combined with possible easing of capital rules, are gaining attention. These developments occur as Trump’s tariffs, merger trends, and high interest rates shape banking conditions. Investors are closely watching to see if these forces support recovery in US bank stocks. After years of underperformance, banks may now be positioned for renewed activity and possible gains. The outcome will depend on how financial institutions adapt to changing oversight and evolving market dynamics.

Banking Recovery Trails Tech Sector Despite Recent Gains

US bank stocks rose last year, with the KBW Bank Index climbing 33% after a slow period. However, it remains over 7% below its 2022 high, showing incomplete recovery. The S&P 500, however, rose more than 30%, driven mostly by action in tech stocks. Banks are able to benefit when there are tensions abroad, since such tensions tend to encourage trading volumes. Increased volumes can support bank revenue, especially in volatile markets. These contrasting trends show the sector’s potential upside while highlighting its current limitations in a tech-driven market environment.

Fed Stress Test and Capital Proposal Could Impact US bank stocks

The Federal Reserve’s annual stress test results are due this Friday and may influence investor confidence. The test examines 22 large banks under economic stress to assess financial durability and risk management. This year’s scenario appears milder, raising expectations for stronger performance among tested institutions. Positive results may enable banks to boost dividend payouts and repurchase shares. A separate proposal to ease the enhanced supplementary leverage ratio is also under consideration. If adopted, it would reduce the capital banks must hold relative to total assets, freeing up more operational flexibility.

Michelle Bowman, Vice Chair for Supervision at the Federal Reserve, has supported easing the leverage requirement. Her position suggests that mergers and acquisitions may face fewer regulatory delays compared to prior years. This change is already influencing activity in the banking sector and investor sentiment. Northern Trust Corp. recently denied acquisition rumors involving Bank of New York Mellon Corp., stating it will remain independent. Analysts at Morgan Stanley expect more streamlined approval processes for deals moving forward. These developments point to a friendlier environment for bank consolidation efforts.

Market Risks Persist Amid High Interest Rates and Economic Uncertainty

Yet, there are a number of threats hanging over investor hopes for bank earnings this year. Jefferies Financial Group just posted a decline in investment banking and capital markets revenue. The decrease mirrors worldwide uncertainty and risk-averse business sentiment in the context of continued geopolitical tensions. High interest rates are another problem, making borrowing costlier throughout the financial system. The collapse of Silicon Valley Bank in 2023 highlighted structural risks tied to prolonged rate increases. The longer rates remain high, the more likely financial strains will emerge elsewhere in the sector.

Investors Favor Regional Banks Amid Concerns Over Rate Impact

Some investors remain interested in bank stocks but are cautious in their approach and selection. Smead Capital Management continues to invest in the sector but closely monitors long-term rates and earnings conditions. CEO Cole Smead noted that higher rates can slow dealmaking and reduce wealth management activity. He believes regional banks with limited exposure in these areas may perform better. Analysts at Baird have also pointed to smaller lenders as offering more room for growth. In contrast, larger banks may have already priced in recent gains, limiting their upside potential.