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Trends in Bank Stocks to Watch for the Biden Presidency

Bank stocks have far outpaced the broader S&P 500 since President Biden's election victory, but the road ahead will be tougher.

U.S. banks have been one of the top-performing stock sectors in the wake of President Joe Biden's election victory in November, with many confirming that investor faith through stronger-than-expected fourth-quarter earnings and robust near-term forecasts. 

Investors should be cautious, however, about adding to holdings in the biggest American lenders, as a host of issues expected to boost profitability fail to materialize and the potential for tighter regulations could keep the sector in check over the first half of the year.

The S&P 500 Financials index, a sector benchmark, has risen more than 25% since late October, as Biden increased his lead over Donald Trump and investors extended bets on deeper stimulus spending from a Democratic Congress. 

That gain remains well ahead of the 16% advance for the S&P 500 itself and was largely justified by a 21.5% increase in fourth-quarter earnings for the country's six biggest banks -- JPMorgan Chase  (JPM) - Get JP Morgan Chase & Co. Report, Citigroup  (C) - Get Citigroup Inc. Report, Bank of America  (BAC) - Get Bank of America Corporation Report, Goldman Sachs  (GS) - Get Goldman Sachs Group Inc. (The) Report, Morgan Stanley  (MS) - Get Morgan Stanley Report and Wells Fargo  (WFC) - Get Wells Fargo & Company Report  -- which collectively generated $32.6 billion in net income for the three months ending in December. 

The hard work comes next, however, as banks must grapple with an interest rate environment that remains difficult for any institution that borrows over the short term and lends to clients over the longer term. The difference in yield between one-month Treasury bills and benchmark 10-year notes, for example, is less than 1%, small beer for an industry that is seeing rising costs, stricter regulations and the growing need for investment in new technology to see off smaller, swifter rivals.

The Federal Reserve also pledged this week to keep up both the pace and quantity of its bond purchases, which are taking some $120 billion from the market each month, in order to keep market interest rates low. It's also firmly indicated that benchmark lending rates won't rise from their current, near-zero levels until at least 2023. 

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Questions over the fate of Biden's $1.9 trillion stimulus ambition, which is already getting pushback on Congress and faces potential delays from the impeachment proceedings against Trump, are also expected to hold back gains for the sector over the coming weeks.

A slow rollout of the Pfizer  (PFE) - Get Pfizer Inc. Report and Moderna  (MRNA) - Get Moderna Inc. Report vaccines, as well, are limiting both a broader economic recovery and the re-opening of thousands of shuttered businesses, two key components of the credit lending profile of any major lender. 

Biden is also under pressure from House Democrats, notably Maxine Waters, to dump a Trump administration series of financial regulations -- including Reg BI, which forbids banks from acting against their clients' interests -- that consumer advocates say don't go far enough in protecting borrowers and holding lenders to account.

That said, even though JPMorgan CEO Jamie Dimon sees a "very healthy" domestic economy in the second half of the year, the country's biggest bank doesn't forecast a pick-up in lending demand and noted that tough comparisons will make it hard to top the investment banking earnings gleaned from the incredibly volatile financial markets of 2020. 

That likely leaves bank stocks in a holding pattern until we see a wider distribution of vaccines -- only 4.3 million people in the U.S. have received two shots of either the Moderna or Pfizer dose, according to CDC data published on Jan. 28 -- and a corresponding pick-up in hiring. 

Big investors, however, aren't waiting for the next wave of the rally to get in: Bank of America's closely-tracked survey of global fund managers noted that allocation to big bank stocks increased by 13 percentage points this week to a net overweight of 17%, the highest figure in two-and-a-half years. 

JPMorgan Chase, Goldman Sachs and Wells Fargo are holdings in Jim Cramer’s Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells these stocks? Learn more now.