To The Moon

What Is Driving the Rally in Bank Stocks

Earnings Expectations and Strong Financial Results Momentum

Analysts expect overall S&P 500 financial earnings to rise around 6.7 per cent year-on-year for the December quarter, supported by solid profitability and credit quality. This has helped underpin bullish sentiment in the sector. 

Net Interest Margin Expansion and Broad Loan Growth

Banks have benefited from a period of higher interest rates throughout 2024–25, which lifted net interest margins (NIM) — the difference between interest earned on loans and interest paid on deposits. Firms are projected to sustain, or even modestly expand, NIM into the current quarter. 

Resilient Credit Quality and Economic Backdrop

Delinquency trends have generally remained benign across consumer and corporate loans, which reduces the need for loan loss provisioning and supports earnings. 

Improving Investment Banking and Trading Revenues

Deal-making activity, particularly in mergers & acquisitions and capital markets, has picked up, boosting investment banking fees and trading revenues — a key growth driver for bulge-bracket banks. 

Positive Market Structure and Macro Signals

A favourable interest rate environment, together with expectations for continued GDP growth and constructive bond market signals, has encouraged investors to rotate back into financials ahead of earnings. 

Key Metrics Heading Into Earnings Season

As the major banks report their quarterly results, the market will focus on several core performance indicators. Each offers unique insight into different parts of banks’ operations and future prospects.

1. Net Interest Margin (NIM)

This remains one of the most closely watched metrics, because it directly affects net interest income, the largest component of most banks’ revenue.

• A rise in NIM signals that banks are earning more on loans relative to their cost of funds — a bullish factor for profitability.

• A contraction could indicate renewed pressure from a flattening or declining interest rate curve.

Investor takeaway: Stronger-than-expected NIM is typically a positive surprise; any signs of compression could temper valuations. 

2. Loan Growth and Credit Demand

The pace of loan growth — both consumer and commercial — is a barometer for broader economic activity.

• Sustained increases in loans help drive interest income and often reflect stronger business investment and consumer confidence.

• Weak loan growth, in contrast, may signal slowing economic momentum.

Investor takeaway: Healthy loan growth supports optimistic projections for future earnings; slowing demand may raise red flags. 

3. Capital Returns (Dividends and Share Buybacks)

Banks’ capital return policies are critical in a high-valuation environment.

• Robust dividend increases or authorisations of share buybacks tend to buoy stock prices, because they signal confidence in future earnings and capital strength.

• Conversely, restraint on capital returns can disappoint investors, even in the context of steady earnings.

Investor takeaway: Upwards revisions to capital returns are generally positive for valuations and total return potential.

4. Credit Quality Trends

This encapsulates non-performing loans, delinquency rates, and loan loss reserves.

• Stable or improving credit trends underscore the resilience of banks’ balance sheets.

• Rising delinquencies can be an early warning of stress, particularly in higher-risk lending segments.

Investor takeaway: Market participants increasingly prioritise credit quality as a forward indicator of earnings risk — especially if macro pressures begin to rise. 

Conclusion

The current rally in bank stocks appears to be driven by a combination of strong earnings momentum, expanding net interest margins, broad loan growth, solid credit trends and improving activity in capital markets revenue segments. With valuations stretched in some areas, investor focus will now centre on whether upcoming earnings results can confirm that growth and profitability trends are sustainable.

The most informative metrics heading into this earnings season are likely to be:

Net interest margins (as a proxy for core profitability)

Loan growth (as an indicator of demand and economic strength)

Capital returns (as a sign of confidence and shareholder-friendly policies)

Credit quality (as a forward risk signal)

Strong results across these categories — particularly if banks beat expectations on NIM and loan growth — could reinforce the rally and justify elevated valuations. Conversely, signs of margin compression or rising credit risk could prompt a reassessment of the sector’s valuation premium.