- U.S. bank stocks are rallying into big-bank earnings as a bull-steepening Treasury curve lifts net interest margin expectations.
- Solid U.S. growth forecasts and easing inflation are supporting credit and broader risk appetite.
- A rebound in M&A, IPOs, trading, and investment-banking fees is expected to drive strong Q4 results for several large banks.
- Analysts warn much of the upside is already priced in, leaving valuations near fair value and returns dependent on avoiding macro/regulatory surprises.
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U.S. financial shares are off to a strong start this year, with the S&P 500 Financials Index rising over 5% in the past month and outperforming the broader S&P 500 by a wide margin. Key banks including JPMorgan Chase, Goldman Sachs, Bank of America, Morgan Stanley, Wells Fargo, and Citigroup are trading near multi-year or record highs heading into their Q4 2025 earnings wave beginning mid-January.
A major driver is what’s called “bull steepening” in the U.S. Treasury curve—short-term yields falling faster than long-term yields. With the two-year vs. 10-year yield spread at about 72 basis points—the widest in roughly four years—banks stand to benefit as their traditional model involves funding via short-term borrowing while lending at longer term rates. This widens net interest margins.
On the macro front, growth forecasts for the U.S. are centered around ~2.0% for both 2025 and 2026, supported by strong consumer spending, corporate investment, and AI-driven capital expenditure. Global GDP forecasts sit between 2.5% and 3.2%, depending on region and models; inflation is expected to moderate which should provide breathing room for central banks.
Corporate profitability in banking seems to be benefiting from several compounding tailwinds: evidence points to strong investment banking fee recoveries, resurgence in IPO pipelines, and robust capital market activity. Dealmaking activity globally, by several measures, surpasses the $4.4–$5 trillion range in 2025—nearing or breaking previous records—boosting fee income across major banks.
That said, risks are looming: some analysts argue that much of the positive story is priced in. Valuations for several large banks are now viewed as near fair, if not slightly rich, particularly given potential headwinds such as slowing growth, inflation surprises, or tighter regulatory pressures.
Strategically, banks likely to benefit most are those with strong investment banking platforms, diversified revenue streams (e.g., trading + advisory), and favorable exposure to net interest margin expansion. Meanwhile, banks reliant on lower-growth loan portfolios or more sensitive to deposit costs may underperform if the yield curve dynamics or inflation shift unexpectedly. A measured bias toward selectivity rather than broad sector exposure seems prudent.
Supporting Notes
- S&P 500 Financials Index rose over 5% in about a month versus a ~0.8% gain for the broader market.
- Two-year vs. 10-year U.S. Treasury yield spread has reached about 72 basis points—the most in roughly four years.
- U.S. economists forecast ~2.0% GDP growth in both 2025 and 2026.
- Global GDP projected at ~3.1% for 2026 by IMF / Capital Group; emerging markets (led by China) expected ~4%; Europe more modest (~1.1%).
- Global dealmaking & M&A value estimated at $4.39–$5.1 trillion in 2025, a 45% increase over 2024.
- Dealmaking is expected to support bank advisory and underwriting fees, with IPOs from high-growth companies (OpenAI, Anthropic, etc.) contributing additional upside.
- EPS projections: Citigroup ~+32%, Wells Fargo ~+17.5%, Morgan Stanley ~+8% in Q4 2025; Goldman Sachs possibly facing a slight drop.
- Some analysts (e.g. Baird) believe that valuations already reflect much of the sector’s positive outlook, and see balanced risk/reward going forward.