If investors were only tuned into the major media during 2025, then it was very easy for them to miss out on a massive recovery rally that actually took the S&P 500 to new all-time highs. And despite Fed Chairman Jerome Powell continuing to hold interest rates higher for longer, there may be a new Golden Age shaping up for banks.
There are of course no guarantees that the current pluses turn into a new Goldin Age, but a lot of things are happening even as the economic data are pointing to lower growth ahead.
Tactical Bulls has identified 9 key points that are helping he view that banks are entering a new golden age of sorts. There are of course other points, and there are some serious risks that are still out there.
THE NINE POINTS
America’s largest banks by assets were awaiting the annual Federal Reserve stress test results. While the Trump administration has already signaled rolling back many regulations, the big banks deemed systemically important were expected to pass stress tests with flying colors. This is expected to follow prior years of history with the announcements of addition stock buybacks and dividend hikes. The results were not available at the time of this post.
The Federal Reserve has voted 5-2 to take serious steps toward deregulation that will directly and indirectly free up capital. The move may untangle the banks from more than a decade of post-crisis capital reserve requirements. If Morgan Stanley’s estimates prove to be true, a relaxing of the rules around bank leverage could unlock $185 billion in capital that can directly go into the system. It may also unlock well over $5 trillion in balance sheet capacity for those large systemically important banks. This move is not intended to roll back all post-crisis regulations. A simple view is that it would lower capital requirements against lower-risk assets. The move is also expected to increase participation in the U.S. Treasury market.
Consumers are feeling more confident. A fresh look at Consumer Sentiment from the University of Michigan showed that Consumer Sentiment rose to 60.7 in June from May’s final 52.2 reading. This survey period included days from May 27 to June 23 (which includes the ICE protests around the country and a hot-box time with Iran) and includes the shooting of lawmakers in Minnesota. It turns out that all of those tariff fears have already taken a backseat in the minds of consumers. The forward inflation outlook also came down, with the outlook of inflation a year out to be 5.0% rather than the 6.6% outlook in May. All of those grand recession fears seem to have vanished.
Trade deals are actually happening. The United Kingdom was the first major trade deal with the United States. Now the U.S. and China have signed a trade agreement, and China released some of the details to confirm that the “deal” was actually signed and agreed to. President Trump has delayed tariffs until July on the European Union to give them time to sign a deal. While politics and political views have been at odds against tariffs, the issue has somehow never really been explained by the antagonists about the how and why the U.S. cannot charge some of the same “levies and fees” as U.S. exporters pay in foreign countries.
Rate cuts are actually still expected despite all of Jerome Powell’s jawboning about “higher rates for longer.” The current 4.25-4.50% targeted range of Fed Funds is starting to see movement lower using the CME FedWatch Tool. At noon Eastern Time on June 27, the odds of a 0.25% rate cut were only 20.7% for the July 30 FOMC decision; and there is no August meeting as the Jackson Hole Economic Symposium takes center stage. Where Fed Funds futures get real interesting is that there is a 73.2% probability of a 25 basis point cut at the September 17 FOMC meeting, and the October 29 FOMC meeting’s highest percentage odds is 55.9% that Fed Funds will be down in the 3.75-4.00% range. And the odds of Fed Funds lower at the December 10 FOMC meeting show 47.1% for a 3.50-3.75% range and 34.2% for a 3.75-4.00% range (and only 8.0% chance for a 4.00-4.25% range). The long and short of the matter is that, as of now, and tariff fears on inflation, the market is currently pegging Fed Funds to be 50 or 75 basis points lower by the end of 2025.
Jerome Powell will soon be gone. He is now less than 11 months away from his term expiring as Chairman of the Federal Reserve. Powell is generally deemed the key rate-curmudgeon inside the Federal Reserve, insisting that interest rates should not be cut. And despite professing that the Fed will be “data-dependent” for years, Powell has started using the risks of potential supply shocks and potential one-time price hikes from tariffs to take a wait and see attitude. Meanwhile, consumers, businesses and the government are all being forced to pay higher interest rates by the tune of about 2 full percentage points compared to most major economies (including China, Spain, Italy and so on).
The U.S. credit rating downgrade by Moody’s was a nothing burger. That downgrade hurt a lot of feelings, and it looks like bad optics with so much debt, but the sudden jump in long-term Treasury rates did not hold. The 10-year Treasury note was last seen at 4.25%, down from a post-downgrade high of 4.60% (and versus an April-low of 4.00%). The yield on the 30-year Treasury’s “long bond” is back down to 4.75% after peaking at 5.09% in May (but still up from the 4.42% low earlier this year). The fears were higher that “U.S. exceptionalism” was ending. While this can still be argued, the end of American greatness is not quite as likely as it seemed sixty days earlier.
Will the total U.S. deficit actually start to plateau? This topic is up for debate, but it is possible that with the added income from tariffs and with some proposed spending cuts that the rise of the deficit may decelerate (that’s still growing, just not as fast). Lower interest rates after Powell’s tenure as Fed Chairman, locked in tax codes, more stable prices, lower energy costs, and higher corporate earnings and solid wages may all help more than critics are willing to discuss. Every single one of those points are admittedly up for debate. And, whether or not politicians who say they want lower spending but fight any spending cuts in their district pans out remains to be seen.
The Federal Reserve itself could also bring some help under a new Chairman’s leadership. After peaking at almost $9 trillion from early 2022, the Fed’s balance sheet is currently down to about $6.6 trillion. The problem is that the balance sheet was barely $4 trillion at the start of Covid-19 in 2020. By continuing sales the Fed is still engaged in quantitative tightening. If the Fed would stop sales, it lowers available capital for politicians to spend, but with some creativity (and likely a legal hurdle to boost) this could be transferred in a different manner and it would end any ongoing quantitative tightening that keeps Treasury yields higher.
THE FLIP-SIDE
A word of caution may always be needed, or at least looking at the other side of the coin is always beneficial. Tactical Bulls is supposed to be about finding tactical opportunities for upside. Investors need to consider some of the risks.
And how are the big banks, designated bank holding companies and other systemically significant financials looking in 2025? Most of the banks and systemically important financial leaders have outperformed the S&P 500 both YTD and over the last year. There are some overbought readings in the market and in the bank and financial sectors. Some of these stocks are now bumping up against all-time highs. Some of them are also close to (or above) their consensus analyst price targets. And while book value per share (stated BV) is expected to rise again for the June quarter, most of the banks are at or above historical valuations against their book value per share. The forward P/E ratios are also higher by 2 to 3 points compared to valuation metrics used in recent years.
HOW THE BANKS ARE REALLY DOING
Here is a snapshot of each of the major financial stocks in this review.
American Express Co. (NYSE: AXP) was up 7.7% YTD and up 38% from a year ago. AmEx was at $319.51 and its consensus analyst price target was $296.21.
Bank of America (NYSE: BAC) was up 7.7% YTD and up 20% from a year ago. At $47.33, BofA’s consensus analyst price target was $50.11.
Bank of New York Mellon (NYSE: BK) was up 19% YTD and up 56% from a year ago. BNY’s $9.150 share price is against a consensus analyst price target of $95.00.
Capital One (NYSE: COF) was up 19% YTD and up 57% from a year ago. At $212.00, its consensus analyst price target was $225.84.
Citigroup, Inc. (NYSE: C) was up 20% YTD and up 37% from a year ago. Citi’s last price was $84.50 with a $86.43 consensus analyst price target.
Goldman Sachs Group (NYSE: GS) was up 21% YTD and up 51% from a year ago. Goldman Sachs’s current $693 share price is against a consensus analyst price target of $592.20.
JPMorgan Chase & Co. (NYSE: JPM) was up 20% YTD and up 45% from a year ago. Team Dimon’s stock was at $287.50 and its consensus analyst price target was $277.55.
Morgan Stanley (NYSE: MS) was up 13% YTD and up 45% from a year ago. Morgan Stanley was last seen at $141.50 and its consensus analyst price target was $125.55.
State Street Corporation (NYSE: STT) was up 8% YTD and up 46% from a year ago. At $105.75, State Street’s consensus analyst price target was $105.79.
USBancorp (NYSE: USB) was actually down by 4% YTD but still up 15% From a year ago. USB’s stock was at $45.85 and its consensus analyst price target was $50.09.
Wells Fargo & Co. (NYSE: WFC) was up 14% YTD and up 40% from a year ago. Wells Fargo was last trading at $79.85 and its consensus analyst price target was $81.37.
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Please note that any of the above points have been widely skimmed over to make for a quicker read. These could all have dissertations for each point. And, as stated above, any of the points can be debated by the nonbelievers.