Will 2026 be a Great Year for Banks? ETFs in Focus

Amid favorable interest rates, improving credit demand and capital market activities, 2026 is shaping up to be a potentially strong year for the banking sector. After several years of volatility, thanks to Fed rate hikes and inflationary pressures, banks may finally find themselves in a more favorable macro environment.

The segment has started to fly higher this year. Invesco KBW Bank ETF KBWB has added 25.3% so far in 2025, beating 17.1% gains recorded in SPDR S&P 500 ETF Trust SPY. However, the broader financial State Street Financial Select Sector SPDR ETF XLF has advanced 11.3% in the year-to-date frame.

Let’s delve a little deeper into the fact why bank stocks could soar in 2026.

Upbeat Zacks Ranks

The Finance sector ranks second out of the 16 Zacks classified sectors. The Financial - Investment Bank category, from which most big banks come, is also strongly positioned at present. The industry ranks in the top 11% of the 243 industries classified by Zacks.

Steepening Yield Curve in the Cards?

The Fed is currently cutting interest rates. If risk-on sentiment in the market holds (assuming the so-called AI bubble doesn’t burst), long-term bond yields are likely to rise, while short-term yields will decline due to the Fed’s rate cuts.

This would steepen the yield curve — a positive for the banking sector — by boosting banks’ net interest margins. However, healthy credit demand is necessary to support gains in the net interest margins.

Cheaper Valuation

The financials sector currently trades at a forward price-to-earnings multiple of 11.47 versus 20.01 possessed by the S&P 500. The Financial - Investment Bank industry trades at a forward P/E of 17.12X.

Projected EPS Growth of the sector is a solid 9.80% versus the S&P 500’s growth of 7.62%. The Financial - Investment Bank industry’s growth is 18.18%. The financials sector currently has a lower debt-to-equity ratio of 0.32X than the S&P 500’s 0.57X. The Financial - Investment Bank industry’s debt-to-equity ratio is even lower at 0.26X.

Deal-Making in Fine Fettle Despite Trade Uncertainty 

Despite ongoing tariff threats and policy uncertainty, banks reported in mid-2025 (mentioned on Yahoo Finance) that corporate clients remain undeterred. Companies are still pursuing mergers, issuing debt and going public. This shows that strategic initiatives are in place, irrespective of short-term trade risks.

Investors should note that for banks’ equities trading desks, volatility isn't a threat; it’s a business driver. Their profits don’t depend on whether markets rise or fall, but on the volume and frequency of trades. As stock prices are volatile this year, banks have benefited from elevated trading activity. In the future, too, banks will be there to enable trades and collect fees at every turn.

Upbeat Q3 Earnings

We now have third-quarter results from 100% of the Finance sector’s total market capitalization on the S&P 500 index. Total earnings for these Finance sector companies grew more than 25.4% from the same period last year on 8.4% higher revenues, with 90.3% beating EPS estimates and 74.2% beating revenue estimates.

JPMorgan Chase & Co. JPM, Wells Fargo & Company WFC, Citigroup Inc. C, Goldman Sachs GS, Morgan Stanley MS and Bank of America BAC beat both top and bottom-line estimates in their latest earnings releases.

The capital markets segment is finally delivering results after several quarters of management highlighting improving deal pipelines. While activity has remained low by historical standards, the favorable regulatory and monetary policy environment makes it reasonable to be optimistic about the sector’s prospects.

Consumer spending and household finances remain stable. Credit demand shows signs of improvement, and delinquencies have declined from their peaks despite some occasional strains.

Bank ETFs in Focus

Against this backdrop, financial exchange-traded funds (ETFs), such as iShares U.S. Financial Services ETF IYG, iShares US Financials ETF IYF, Invesco KBW Bank ETF KBWB, Financial Select Sector SPDR XLF and Vanguard Financials ETF VFH, should gain. ETFs like KBWB and First Trust NASDAQ Bank ETF FTXO have also been hovering around a 52-week high.

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This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research