Why Big Bank Stocks Are Beating the Mag-7

Big bank stocks have been shining this year. Shares of Citigroup (C) and Goldman Sachs (GS) are up 62% and 59% respectively, and many other names are also outperforming the Mag-7 stocks, with the exception of Alphabet (GOOG).

The largest U.S. banks recently reported strong third-quarter results, with profits and revenues exceeding expectations thanks to revived M&A and IPO activity, steady corporate spending, and solid consumer activity.

These banks have benefited from a resilient economy and healthy loan portfolios, and they continue to gain from strong trading amid a rising stock market. Collectively, the six biggest banks earned nearly $41 billion, up 19% from the prior year, per WSJ.

Bank CEOs did express some caution about potential challenges ahead, noting that a cooling job market could strain lower-income households. Still, banks are now positioned to benefit from lighter regulatory scrutiny under the Trump administration after a more aggressive regulatory agenda under the Biden administration.

Relaxed capital rules have also provided a boost to bank stocks. In addition, the major banks are leading in AI adoption and are already reporting measurable cost savings and efficiency gains.

Regional banks, on the other hand, have not fared as well, as many carry higher exposure to commercial real estate and other pressured sectors.

Regional bank stocks sold off sharply in October following charge-offs linked to the fraud-related bankruptcy of subprime auto lender Tricolor Holdings and auto-parts supplier First Brands Group.

With the Fed cutting rates this week and potentially a few more times next year, banks could benefit further. If rate cuts are accompanied by a steeper yield curve and a resilient economy, banks may see wider net interest margins and stronger loan demand.

The Financial Select Sector SPDR Fund (XLF) is the largest and one of the cheapest ETFs in the space. Berkshire Hathaway (BRK.B) and JPMorgan (JPM) are its top holdings.

The Invesco KBW Bank ETF (KBWB) holds large money center banks, regional banks, and thrift institutions. It is among the best-performing products in the sector over the past year.

The SPDR S&P Regional Banking ETF (KRE) tracks an equal-weighted index of regional banks.

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

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