Bank stocks have had an interesting run in 2018. Widely expected to outperform, as the result of tax reform and deregulation, they lagged the market significantly in the first two quarters. So far in the third quarter, however, they are roaring ahead, and the iShares ETF unit of investment management giant BlackRock Inc. indicates that it's favoring bank stocks for the second half of 2018, per The Wall Street Journal. The "Big Six" U.S. banks include Bank of America Corp. (BAC), Citigroup Inc. (C), Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM), Morgan Stanley (MS) and Wells Fargo & Co. (WFC). All have participated in the recent rally. (For more, see also: Top 4 Bank Stocks for 2018.)

Bank Stocks: Leading the Pack

Stock Gain Since June 29
Bank of America 11.8%
Citigroup 8.9%
Goldman Sachs 7.8%
JPMorgan Chase 13.4%
Morgan Stanley 6.4%
Wells Fargo 6.1%
KBW Nasdaq Bank Index 6.5%
KBW Nasdaq Regional Banking Index 1.7%
S&P 500 Financial Sector Index 6.7%
S&P 500 Index (SPX) 5.2%

Source: Yahoo Finance, based on adjusted close data through the August 7 close.

The widely-followed KBW Nasdaq Bank Index (BKX) tracks the share price performance of the 24 largest U.S banks. By contrast, the KBW Nasdaq Regional Banking Index (KRX) includes smaller banks. The big bank index is up by 3.7% year-to-date (YTD), while the regional bank index has gained 4.4%. Hank Smith, co-chief investment officer at Haverford Trust, told that Journal, "Although smaller [bank] stocks have outpaced larger [bank] stocks this year, we still like them [the big banks] due to huge positives including economic strength, regulatory reform and the ability to return capital to shareholders."

6 Forces Driving Big Bank Stocks

Strong Earnings
Stock Buybacks (Share Repurchases)
Global Economic Growth
Increased Lending Activity
Rising Interest Rates
Stock Price Volatility

Source: The Wall Street Journal.

A disappointment for investors in small bank stocks has been less merger activity than was expected, the Journal notes, adding that the benefits from tax reform are diminishing as time progresses. Moreover, shares of Fifth Third Bancorp (FITB) have sunk in response to its announcement of an expensive acquisition, leading to a generalized questioning of valuations among regional banks. Back to the big banks, JPMorgan Chase often is cited as a bellwether for the group, given that it is the largest by assets, and widely viewed as a well-run enterprise across divisions that span all major facets of the industry.

JPMorgan Chase: Lean & Fit

Shares of JPMorgan Chase have spurted ahead in response to strong second quarter results that were spread across several of its major lines of business, per the WSJ. Profits were up 18% year-over-year (YOY) and both revenues and profits beat analysts' estimates. Indicative of the company's operating efficiency, over the 12 months ending June 30, it generated 16% more revenue and 54% more net income per employee than the average for its peer group of money center banks, according to CSI Market. Second quarter YOY revenue growth also was significantly above the average rates for money center banks, the financial sector as a whole, and the entire S&P 500, also per CSI Market.

The Bearish View

Despite the recent advance, four of the "Big Six" listed above still have share prices that are down on a year-to-date (YTD) basis, including Citigroup, Goldman Sachs, Morgan Stanley and Wells Fargo. Bears base much of their pessimism on the fact that the big double-digit percentage earnings gains enjoyed in 2018 will not be replicable in future years, given that they are mainly driven by corporate income tax rate reductions. (For more, see also: Why Bank Stocks May Fall 8% Further.)