Shares of U.S. banks, which plunged nearly 30% off their highs into bear market territory last year, have made a comeback in the new year. They have rallied by over 20% from their December lows and posted their strongest five-day gains in more than two years on stronger-than-expected fourth quarter earnings. The results have prompted a rising number of bulls to argue that these downtrodden stocks will continue to rise in 2019. This optimism is fueled by a handful of positive drivers including higher interest rates, expanding loan growth, and improved optimism about the economy as the U.S.-China trade conflict de-escalates, per a detailed story in the Wall Street Journal. The table below illustrates how much these stocks have rallied.

Banks' Big Rally

(% Rise from December Low)

·     KBW Nasdaq Bank index; : 21.3%

·     JPMorgan Chase; 12.8%

·     Goldman Sachs; 30.2%

·     Morgan Stanley; 15.5%

·     Bank of America; 28.2%

·     Citigroup; 28.2%

·     Wells Fargo; 16%

Financials Rally in 2019

While the KBW Nasdaq Bank index (BKX) has rallied over 21% since its recent bottom on Dec. 24., the group is still trading 17.2% off its 52-week high, signaling potential for continued upside. 

Banks that suffered the worst at the end of last year have made the most pronounced comebacks, per the Journal. That includes Citigroup Inc. (C), which fell almost 30% in the fourth quarter and has gained 19.3% YTD. JPMorgan Chase & Co., Bank of America Corp. (BAC) and Wells Fargo & Co. (WFC), which all fell 10% in the fourth quarter; have risen between 5% and 19% this month. 

What's Boosting Banks

Fourth quarter results helped ease growing concerns regarding banks’ lending business. According to stock-research firm Autonomous Research, the four big banks and several regional banks that reported last week increased business loans by an average of 3.8% in the latest quarter, the fastest pace in six years. Meanwhile, consumer credit-card spending and lending at the same banks also improved. 

While investors have been concerned about banks’ exposure to international markets during a time of heightened trade tensions, results indicate those fears may be overblown. At Citigroup, core consumer-banking revenue in Latin America and Asia managed to improve, while bank’s treasury and trade services business improved 11% from a year ago.

Additionally, the group stands to benefit from any hike in interest rates, with Citigroup forecasting a $2 billion benefit to income in 2019, equivalent to last year.

Value Plays

On a price to book basis, Bank of America Merrill Lynch views bank stocks as bargains buys. Financial stocks now rank second in BofAML’s “tactical quant sector framework,” based on “positive EPS revisions and attractive valuations," per an earlier Investopedia report. And Goldman Sachs now forecasts bank that earnings will grow dramatically faster than the S&P 500 in both 2019 and 2020, per the bank’s latest US Weekly Kickstart report.

Looking Ahead

Despite this new spurt of optimism, bank stocks disappointed mightily in 2018 despite repeated forecasts that they would outperform. And today, the big banks continue to face a host of challenges. One big question, many investors say, is whether banks can produce strong earnings growth in 2019, when they will no benefit from huge tax cuts. Without those tax savings, bank stocks may be much more vulnerable to a volatile market.