The S&P 500, a collection of the largest publicly traded companies in the U.S., reached a new record high this week. Surprisingly, financial stocks have been leading the charge in this rally, with share prices of major banks hitting all-time highs and surpassing the tech sector on some days.
So far this year, the S&P has risen by over 18%, with Goldman Sachs up nearly 24% and JPMorgan shares climbing over 20%. This comes as a surprise considering that financial stocks have historically lagged behind the rest of the market, especially following the crisis in the banking sector just a year ago.
According to Dave Donabedian, the CIO of CIBC’s private wealth division, money is flowing into the financial sector for the first time in a while. Investors are diversifying away from tech stocks and are attracted to bank stocks for their enticing dividends.
Despite the fact that lending, a key component of the banking industry, is not experiencing significant growth, and the overall economic environment is not particularly favorable, financial stocks are soaring as part of a broader market trend that some believe may lead to a market correction in the future.
In the short term, bank stocks may continue to rise due to better than expected inflation numbers released recently, hinting at potential lower interest rates.
Looking back at the banking crisis of 2023, the market now seems to believe that banks have successfully weathered the storm. Big banks were better equipped to handle the crisis compared to regional banks, as their larger balance sheets allowed them to absorb the impact of rising interest rates and the collapse of commercial real estate.
The crisis actually benefitted large retail banks, as many customers from smaller institutions sought safety in bigger banks like JPMorgan. The proactive measures taken by financial regulators in response to the crisis also instilled confidence in investors regarding the sector’s stability.
While it’s uncommon for financial stocks to be top performers, they are currently enjoying a period of success in the market. Subscribe to the CEO Daily newsletter for insights from global CEOs on key business stories.