Banking stocks were gainers on Monday, but how long can they sustain momentum?

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By:

Motiur Rahman

on
May 24, 2022

Banking stocks traded higher on Monday.

The rise in banking stocks was attributed to improved sentiment.

Banking stocks still face pressure from concerns of stagflation.

Stocks of major US banks made strong comebacks on Monday after remaining in the red for some weeks. JPMorgan Chase & Co. (NYSE:JPM) jumped 7%. Bank of America Corporation (NYSE:BAC) and Citigroup Inc. (NYSE:C) added more than 6%. Wells Fargo & Company (NYSE:WFC) gained almost 6%. 

The gains on Monday followed JPMorgan’s note that it could reach key return targets earlier than projected. The bank cited the rising interest rates, which improved the sentiment among peers. Of course, markets are warming up to further rate increases by the Fed as inflation runs hot. Banks institutions tend to benefit in environments of higher rates as they can lend for higher margins.


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Nonetheless, can the banking stocks sustain the momentum and recover from this year’s drop? 

Looking back, banking stocks have been in the red year-to-date. JPMorgan is down 22% YTD, while Citi has shed 15%. Bank of America has lost 21%. Concerns about high inflation and mixed earnings in the last quarter played a role in the decline. With inflation running hot, banking stocks may face difficulties staging sustained recoveries. The thesis draws from the fact that too much inflation hurts loan demand or makes repayment difficult. Stagflation fears may also scale down business activity, hurting lending.

Banking stocks emerging from their yearly lows

Source – TradingView

On the weekly chart, banking stocks can be seen emerging from the oversold yearly bottoms. The improved sentiment is boosting the stocks. We expect the stocks to continue moving higher in the near term. We recommend a long-term hold of the stocks, expecting corrections at their respective resistances.

Summary

Banking stocks rose on Monday on prospects of bigger margins due to higher interest rates. However, the general economic weakness may make sustainable recoveries difficult. We recommend investors buy only for a long-term hold.

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