This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

The Deal: Sentiment Turns Sour on Bank Stocks

NEW YORK (The Deal) -- Strategists are turning bearish on bank stocks as JPMorgan Chase (JPM) negotiates a potential $11 billion legal settlement while investors digest the Fed's somber assessment of economic growth.

The S&P 500 banks stocks index hit a five-year high of 203.36 last month but has shed around 3% since last Wednesday when the Federal Reserve decided to continue its stimulus program, citing an uncertain outlook.

JPMorgan has been the worst performer among listed American investment banks for the year to date, though it has still gained around 15%. The bank has been laboring with legal woes stemming from the so-called London Whale trading debacle and its sale of mortgage-backed securities.

Leading the pack is Morgan Stanley (MS) with a gain of around 40% as it overhauls its business to emphasize wealth management while cutting riskier trading and commodities operations.

Several strategists believe banks stocks have seen their best run for now. Barclays' head of U.S. equity portfolio strategy, Barry Knapp, said he was underweight banks, citing limited room for margin growth, while new loan growth remains sluggish. He said the outlook for investment banks appeared more fraught than that for regionals.

"Regional banks and Wells Fargo could benefit from a loosening of credit but for the big money center banks, why would you buy an entity leveraged 20 times with a return on equity of 8? You need to believe [ROE] will get to double digits," he said at the bank's Global Outlook conference on Thursday. Knapp said the final form of capital requirements would be critical to banks' returns, noting their performance was "terrible" during the 1950s when the sector was heavily regulated.

His views have been echoed by Lazard's managing director of financial institutions group, Jim Spencer, who has noted that new regulatory and capital requirements may jeopardize banks' appeal to investors if their returns fall much further.

Even the bulls have moderated their commentary on banks since earlier this year. Bank of America Merrill Lynch's (BAC) chief investment strategist, Michael Hartnett, said that while regulatory headwinds were strengthening, the positive macro story of a recovering housing market offset these negatives.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,083.80 -2.83 -0.02%
S&P 500 1,987.98 +0.97 0.05%
NASDAQ 4,472.1080 -1.5890 -0.04%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs