Bank Stocks Are Lagging the S&P 500 by the Most Since 1990
Bank profits are climbing, yet financial stocks just posted their worst month relative to the broader market in over three decades. Something is driving money out of the sector, and it has little to do with what banks are actually…
This post may contain links from our sponsors and affiliates, and Flywheel Publishing may receive compensation for actions taken through them.
The Invesco KBW Bank ETF (NASDAQ:KBWB) trades near $87, about 14% below its August record. Investors who bought KBWB saw this drop while bank profits kept growing.
Truist Securities analyst Brian Foran said financials posted their worst month against the S&P 500 since 1990. The KBW Nasdaq Bank Index is down 13% from mid-August.
KBWB fell 8% in the past month. It remains up 5% this year and 15% over twelve months, ahead of the S&P 500’s 14%.
Foran compared the pattern to the dot-com era, when money flowed into technology and financials fell behind. The selloff looks like rotation driven by fund flows rather than by bank results.
Profits Keep Climbing While Prices Slide
JPMorgan Chase (NYSE:JPM | JPM Price Prediction) earned an adjusted $6.14 per share in the second quarter, up 13%, according to Truist Securities. Bank of America (NYSE:BAC) grew net income 28%, and Citigroup (NYSE:C) raised first-quarter EPS to $3.06 from $1.96.
Margins, Credit and Shrinking Deal Fees
Net interest margin is the gap between what a bank pays depositors and what it earns on loans. The 10-year to 2-year Treasury spread is 0.46%, down from 0.74% in February. That gap gets squeezed when the curve flattens.
Credit quality is back in question. Citigroup set aside an extra $597 million in reserves due to economic uncertainty, though credit card delinquencies fell to 2.85%.
Fee income is the bigger problem. Global merger volume fell to $1.23 trillion in the third quarter from $1.8 trillion in the second, and several IPOs were postponed. Bank of America’s investment banking fees rose 50% in the second quarter, driven by deals.
AI Agents Could Reprice Cheap Deposits
Economist Torsten Slok argues that AI agents could automatically move household cash from checking accounts paying 0.1% into accounts paying 3.3% to 5.0%. This would permanently raise the cost of the cheapest money banks hold.
Deposit beta (the share of each rate move a bank passes to depositors) would rise, eating into margins on balances banks pay almost nothing for.
Online banks promised the same shift, and most customers kept their accounts. Bank of America added more than 160,000 net new checking accounts last quarter, its 30th straight quarter of growth.
Pure Bank Exposure or the Whole Sector
KBWB holds only banks, so an investor’s exposure depends on one business model and one rate environment. The State Street Financial Select Sector SPDR ETF (NYSEARCA:XLF) spreads that risk out.
Its largest holding, an insurance-heavy conglomerate, is about 12% of the fund, and the two big card networks are about 7.5% and 5.5%.
XLF fell 6% in the past month. It is up just 2% over the past 12 months.
Where KBWB Fits in a Portfolio
KBWB suits investors who can tolerate interest-rate swings and want concentrated bank exposure, as bank earnings are growing and the selloff looks more like rotation than fundamental weakness. A large position in KBWB concentrates risk in a single rate move or deposit shift.
XLF offers financial exposure with less rate dependence, although its payment and insurance companies have trailed banks over the past year.
The signals that matter from here are clear. Watch the next round of bank earnings, whether the yield curve steepens, whether banks keep adding to loan-loss reserves, and whether deal activity recovers.
Contact [email protected] for any questions or corrections.
Omor Ibne Ehsan is a writer at 24/7 Wall St. He is a self-taught investor with a focus on growth, cyclical, and dividend equities that have strong fundamentals, value, and long-term potential. He also has an interest in high-risk, high-reward investments such as penny stocks.
