Why bank stocks are the ‘Achilles’ heel’ of markets as bears worry high bond yields may ‘break’ something

Bank stocks are in need of a “recovery rally” to show that higher interest rates won’t necessarily doom the U.S. economy to a recession in 2024, according to DataTrek Research.

“At least U.S. bank stocks are not making new 52-week lows even as rates spike, but their recent momentum is pointing in the wrong direction,” said Colas. “Sentiment on this group is terrible, with dividend yields on most S&P 500 bank stocks signaling meaningful declines in earnings power over the next 12 months.”

“If higher yields hit the value of a bank’s bond portfolio, it may need to raise more capital or sell at a distressed price,” said Colas. “If higher yields cause a recession, then loan losses will rise.” When an individual stock’s dividend yield triples that of the S&P 500, which is now at 1.6%, then “as a rule of thumb,” said Colas, “you know the market is saying a dividend cut is coming and earnings power is significantly below what management and their board thinks it is.”

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Bank of America says long-term investors should should buy these beaten-up bank stocksThe recommendation comes even as surging bond yields have the potential to slow the economy and damage the financial sector, weighing on bank stocks.
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