(Bloomberg) --The Federal Reserve's signal this week that rates are likely to come down in the coming months sent a positive jolt through a sector rattled by market uncertainty this year: banks.
The KBW Bank Index soared 9% over two days on the heels of the Wednesday afternoon meeting, its best such rally in nearly three years. That helped lift the index to its highest level since March 8, just before the collapse of Silicon Valley Bank. The prospect of rate cuts eases worries over unrealized losses in banks' securities portfolios, deposit competition and the overall health of the economy.
The rally has left bank stocks "no longer at no-brainer valuation levels," according to Baird analyst David George. "We aren't inclined to chase the strength here," he added.
The sector rallied in recent weeks as yields on 10-year Treasuries retreated.
The recent advance has flipped the script on the sector's performance for 2023, lifting stocks like Fifth Third Bancorp and Western Alliance Bancorp into the green. The rally has also boosted gains for JPMorgan Chase & Co. and Wells Fargo & Co., with both closing Thursday at their highest levels since early 2022.
The KBW Bank Index is slipping on Friday, following commentary from the Fed's Bank of New York President John Williams that talk of a March cut is "premature." The gauge is still up about 8% on the week.
Bank stocks came under pressure earlier this year with Silvergate Capital Corp. saying it would wind down its bank, Silicon Valley Bank tumbling into receivership and Signature Bank failing. The KBW Bank Index's yearly rout reached a nadir of 29%, with the sector staying lower amid concerns over deposit competition, regulatory proposals and potential credit losses if the economy falters.
Analysts appear divided on where the stocks are headed. For the two-dozen stocks in the KBW Bank Index, the aggregated 12-month price targets now imply a slightly negative return potential, according to data compiled by Bloomberg.
Morgan Stanley kept an in-line rating on the sector into 2024 while shifting to a positive bias, calling the stocks cheap but noting the uncertainty around credit. Wells Fargo analyst Mike Mayo said that the outlook for 2024 "involves a wider range of outcomes than in the typical year" and that it's important to prepare for a myriad of scenarios. Truist analyst Brandon King sees "room to run higher" for regional and community bank stocks next year.
