Bank Stocks Are Charging Into Q2 Earnings. Why Wall Street Sees More Gains Ahead

Financial sector stocks are ripping into their second quarter earnings reports. Wall Street analysts think the strength is justified.

The S&P 500 Financials Sector is up more than 8% in the past month, neck-and-neck with healthcare as the best-performing sector during the period. Over the past three months, the sector’s 13% return puts it behind only the tech sector, up 23% due to April and May’s blistering chip stock rally. 

“I am bullish on banks,” Mark Mayo, bank analyst at Wells Fargo, told CNBC on Tuesday. “I think this will be the third year in a row that bank stocks outperform the market.” Mayo and other Wall Street analysts argue strong capital markets activity and a resilient economy boosting commercial loan growth are likely to drive earnings beats for the U.S. banks that kick off second-quarter earnings season next week.

Big banks are in the midst of a “multi-year [earnings per share] inflection,” wrote Mayo in a note on Monday. He argues large lenders are less than halfway through a four-year growth cycle, and expects the group to report earnings increased nearly 20% last quarter. Revenue is expected to grow more than 10%, driven by higher net interest income (NII) and “strong capital markets as mega-banks benefit[ted] from mega-IPOs, mega-mergers, and mega-financings.”

Bank of America analysts on Tuesday cited surprisingly strong capital markets activity for their decision to raise their price targets and earnings estimates for several large banks, including JPMorgan (JPM), Citigroup (C) and Morgan Stanley (MS). They see potential for those banks plus 5 others in their coverage—Wells Fargo (WFC), Goldman Sachs (GS), BNY Mellon (BNY), State Street (STT) and Northern Trust (NTRS)—to beat estimates and potentially raise their guidance for the rest of the year. 

Capital markets activity was strong last quarter due in large part to artificial intelligence. Volatility from the Iran War and the AI chip stock rally boosted trading activity. AI drove a pick-up in merger and IPO activity, with firms making strategic acquisitions and some, including SpaceX (SPCX) and Cerebras (CBRS), capitalizing on AI enthusiasm with blockbuster debuts. The AI data center buildout’s hefty price tag has encouraged tech giants to increase their debt issuance.

To be sure, Mayo sees risks that capital market tailwinds are abating. OpenAI may delay its IPO to next year. Lots of tech’s debt funding has been completed, and investors remain uncertain about the sustainability of spending. Markets should be calmer as Middle East peace talks progress. And Mayo argues capital markets pure plays like Goldman Sachs and Morgan Stanley—whose stocks had gained a respective 20% and 25% this year through Monday’s close—have a lot of positives baked into their share prices. 

But capital markets are just one of the tailwinds Mayo sees fueling banks’ growth in the coming years. “I think the evolving story is the accelerating middle America loan growth, capital expenditures picking up,” Mayo told CNBC. “I’m not talking about the hyperscalers. I’m talking about your plain old bread and butter commercial borrowing.”

After nearly half a century of slow growth, commercial and industrial (C&I) loans are accelerating due to the investment incentives written into last year’s One Big Beautiful Bill, tariff refunds, the knock-on effects of AI investments, and clients’ acceptance that uncertainty is the new norm, according to Mayo. According to Federal Reserve data, banks have added $212 billion of commercial loans to their balance sheets in the past year, lifting the value of all C&I loans by 8% to $2.89 trillion.

The interest rate outlook is also expected to be positive for banks’ net interest income and their stocks, according to Bank of America. The bank’s analysts, who previously forecast a resilient labor market and reaccelerating inflation would force the Federal Reserve to raise interest rates twice this year, now expect no change in rates through December. That call puts in them in the minority. Though oil prices fell to their pre-war levels in recent months, taking some pressure off inflation, the majority of investors still expect at least one rate hike this year.

“We believe the outlook for rates to remain stable/higher is supportive of NII (ex. markets) across our coverage,” BofA analysts wrote on Tuesday. The stocks of lenders that top NII estimates and raise their guidance—as they expect to see from JPMorgan, Citigroup, and trust banks such as State Street—“likely get rewarded despite a high bar.”