Worried about Bank Stocks? Where are they Headed Next?

This time around most banks are reporting better than expected earnings. However, the stock price reaction has been mixed. Overall, the tone seems to be positive on banking stocks which is clearly reflective in the kind of gains they have seen since the start of the year, almost double than that of S&P. Popular banks such as JP Morgan (JPM), Bank of America (BAC), US Bancorp (USB), and Wells Fargo (WFC), all reported strong earnings. Only Citigroup (C) came with somewhat disappointing numbers.

So far the ride has been good for banking stocks, but is it possible for the trend to continue in the near term?

Many analysts are of the view that banking stocks are already pricing in the positives we have seen this earnings season.

So now, all depends on the headwinds the banking sector is likely to face in near future. Nothing concerning as such but political headwinds are surely present.

Also, Debt Ceiling fears could resurface and that could pose as a threat to the banking stocks.

However, the industrial loan growth is pointing towards a real recovery for the banking space. But, there is lack of evidence that the recovery will be buoyant.

It’s hard to see bank stocks continuing with the rally while the 10 year treasury yield is so low.

Investors will be closely watching the 10 year yield, and that could be the next trigger to the ongoing recovery in the banking story, but the stocks might correct meanwhile.

At the same time one cannot keep his eyes off the Fed. Further moves from the Federal Reserve will be the key make or break for the banking sector profits. If the Fed starts raising rates, banking stocks could see a cheerful rally, but if we see more easing down the lane then it could dampen the overall investment sentiment.

So, what should an investor do right now? There is no clear answer to this question, but we can say that the valuations of the banking stocks are not attractive and it makes more sense to wait for dips than buying right now.

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