This Day On The Street
Continue to site
ADVERTISEMENT
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

The Deal: Sentiment Turns Sour on Bank Stocks

NEW YORK ( The Deal) -- Strategists are turning bearish on bank stocks as JPMorgan Chase (JPM - Get Report) 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

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

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
Stocks Under $10

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
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!
SYM TRADE IT LAST %CHG
JPM $62.60 0.00%
AAPL $130.28 0.00%
FB $81.53 0.00%
GOOG $565.06 0.00%
TSLA $218.42 0.00%

Markets

DOW 18,080.14 +21.45 0.12%
S&P 500 2,117.69 +4.76 0.23%
NASDAQ 5,092.0850 +36.0220 0.71%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs