Regional bank stocks are surging and could continue to rise even if second-quarter earnings results are modest. The SPDR S&P Regional Bank ETF (KRE) rose for the sixth straight trading day, closing at its highest since December on Monday. The Regional Bank ETF’s 12.5% gain in July coincided with lower bond yields and traders’ growing confidence that the Federal Reserve will begin cutting rates in September. KRE 1Y Mountain Regional Bank ETF is at its highest since December. A rate cut later this year will not be reflected in second-quarter results, nor will low bond yields following last week’s surprisingly sober inflation report. But as the market looks to the future, investors may take inspiration from the fact that bank stocks outperformed after interest rates peaked in 1995, the last year the Federal Reserve managed to achieve a “soft landing” for the economy. “Bank stocks rose 54% in 1995 when the Fed paused rate hikes after a 250bp hike (34% vs. S&P),” Bank of America analyst Ebrahim Poonawalla said in a July 11 note. “We know that not all periods are the same, but investor comfort with the EPS guidance outlined in the Q2 2024 announcement, combined with discounted valuations, could lay the groundwork for a sustained rebound heading into the US elections,” he added. Regional banks have struggled in the post-pandemic rate hike cycle, as the sharp rise in interest rates has hurt their core business of short-term borrowing in the form of deposits and made it more expensive to make longer-term loans. Commercial real estate has also been a weakness for smaller banks compared to larger, more diversified banks. More than a year after Silicon Valley Bank’s collapse, the group’s shares are still trading below their historic valuations, according to Bank of America. But a rate cut should help ease concerns weighing on the sector. “Banks hit by rising funding costs and perceptions of commercial real estate (CRE) risk should respond positively. We list Western Alliance (WAL) (buy) and New York Community (NYCB) (neutral) as two banks that could particularly benefit from low rates,” Poonawalla said. At the individual stock level, discussions around loan loss provisions and net interest income could be key for regional banks, Goldman analyst Ryan Nash said in a July 1 note. “We believe provisions may be peaking (we conservatively forecast a 2bp increase) and are likely to continue to shave off 1.5% from the current 2020 target,” he said. [loan loss reserve] The increase in the ratio is likely due to a decline in balances. We expect the focus to be on the second half of the year. [net interest income] “Guidance should be decent given tailwinds including repricing of fixed-rate assets, a slight recovery in loan growth and slowing deposit cost growth,” Nash said. Regional bank earnings reports to watch this week include Citizens Financial Group on Wednesday, M&T Bank on Thursday and Fifth Third Bancorp on Friday. — CNBC’s Michael Bloom contributed to this report.
Regional banks’ profits likely to be overshadowed by expectations of interest rate cuts
Services
© 2026 Business Investopedia. All Rights Reserved.