Wells Fargo Analysts Predict Bank Stocks to Outperform

Wells Fargo analysts suggest that bank stocks could excel if there’s a soft landing combined with expected rate cuts, according to a recent client note.

In the note dated Thursday, the firm highlights that historically, rate cuts without a recession are beneficial for bank stocks, especially in the short term.

“Rate cuts with no recession (1995, 1998, 2019) result in bank stocks rallying,” said Wells Fargo.

Analysts noted that in past instances when the Federal Reserve lowered rates without leading to a recession, there was an initial decline of around 6% in bank stocks over one to two weeks. However, this decline was typically followed by a substantial rally, with stocks climbing about 21% from their post-cut lows.

Moreover, during these soft landing periods, Wells Fargo observed that banks outperformed the S&P 500 by nearly 10% in the quarter that followed the first rate cut.

The upcoming Federal Reserve meeting on September 17-18 could be crucial, potentially setting the stage for this pattern to recur.

Conversely, Wells Fargo cautioned that if rate cuts accompany a recession, the outlook for banks would be much less favorable.

In historical cases from 1989, 2001, and 2007, bank stocks saw only modest declines after the initial rate cut and continued to underperform in the next quarter, lagging behind the S&P 500 by about 4%.

Despite the likelihood of short-term gains, Wells Fargo advises investors that the window for outperformance is often short-lived.

“In 7 out of 8 rate cut cycles, banks underperformed the S&P 500 in the period from 3 months to 12 months after the first rate cut,” analysts emphasized. Therefore, investors should act quickly to seize the initial boost before the momentum wanes.