Big Banks Emerge as Winners as Fed Starts Rate Hike Cycle

(Bloomberg) — America’s biggest lenders, including JPMorgan Chase & Co., Bank of America Corp. and Citigroup, are emerging as major winners from the Federal Reserve’s most aggressive campaign to increase borrowing costs in years.

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Banks were among the best performing groups in the S&P 500 Index Wednesday, as the sector rose 3.7% to the highest in two weeks. The KBW Bank Index also surged 3.6%, rebounding from a brief dip as Fed Chair Jerome Powell spoke at his press conference after the central bank raised interest rates by a quarter of a percentage point and signaled that more hikes are on the way.

“Financials are one of the most attractive sectors in the market right now,” said Larry Adam, chief investment officer of Raymond James’s private client group. “One of the catalysts is interest rates moving higher, and that’s going to help lift the expectations of what that sector can produce from an earnings perspective.”

JPMorgan was the best performer among the money center banks Wednesday, rising 4.5% for its best day since January 2021. Citigroup climbed 3.1%, its best performance since Jan. 6, and Bank of America also gained 3.1%.

The rally in banks comes after an ugly start to the year, with the KBW index down 5% in 2022 through Tuesday. In particular, the group has faced fears about global growth as soaring commodity prices set off the worst U.S. inflation in 40 years. In addition, Russia’s recent invasion of Ukraine has further crimped expectations for economic activity.

But Powell appeared to soothe those fears with his comments about the strength of the economy and job market, as well as his confidence in the Fed’s ability to rein in inflation.

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Banks are typically assumed to do well in rising rate environments because they can charge more for what they lend. But that can be a double-edged sword, as higher borrowing costs can hurt demand for loans, cutting into banks’ revenues.

“The Fed is trying to be measured and really meet the market’s expectations,” said Kristina Hooper, Chief Global Market Strategist at Invesco. “In the past, higher rates have been positive for financials. That’s the conventional wisdom.”

Beyond lenders, consumer discretionary stocks rallied 3.4% as Powell spoke, making it the best-performing group in the S&P 500. Technology shares also got a boost, with the information technology sector jumping 3.3% and communications services adding 2.9%, outperforming the S&P 500’s 2.2% advance.

(Adds analyst comment and sector moves in last two paragraphs.)

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