Equity Strategy - Reiterate the UW on Banks

Speaker: Mislav Matejka, CFA, Head of Global Equity Strategy

One of the sector calls where we face the most pushback from investors is our UW on Banks, entered in Q4. Until Q4, Banks had outperformed for three years in a row, driven by better EPS momentum and ultimately by rising bond yields. We have downgraded the sector as we think this phase is over. US 10-year moved from 0.5% in 2020 to 5% last October, the point at which we argued that bond yields have likely peaked. This is even as we tactically think that short-term bond yields are likely to consolidate, and be somewhat higher. Central banks will be cutting rates this year, which will directly reduce the earnings power of the sector. Second, the pressure could arise from the peaking out in relative EPS growth of the sector. The stalling in Banks’ relative EPS momentum could be enough for the sector to stop working. We note that the EPS revisions of European Banks have just recently entered negative territory.  In addition, the net interest income for Banks could weaken, from elevated levels, and deposit betas could increase. Banks meaningfully increased capital return to shareholders, but this could be as good as it gets. Finally, Banks are still a high-beta play on economic momentum and on credit spreads, where the current, rather optimistic, outlook that is priced in the markets might not last. Notably, the commercial real estate remains an overhang for the sector. Regionally, our top pick is Japan, and we still like Japanese Banks vs US and European ones, a call started last April. The Japanese rates cycle remains disconnected from the US and Europe, and it could be moving in the opposite direction this year. Big picture, we keep our view of OW Growth vs Value and preference for US vs International, in effect fading the Nov-Dec market broadening rally. So far ytd, US, Growth and large caps are strongly outperforming International, Value and small caps,  in all regions, and our UW on Banks fits this dynamic.

This podcast was recorded on 18 February 2024.

This communication is provided for information purposes only. Institutional clients can view the related report at https://www.jpmm.com/research/content/GPS-4622395-0 for more information; please visit www.jpmm.com/research/disclosures for important disclosures.

© 2024 JPMorgan Chase & Co. All rights reserved. This material or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. It is strictly prohibited to use or share without prior written consent from J.P. Morgan any research material received from J.P. Morgan or an authorized third-party (“J.P. Morgan Data”) in any third-party artificial intelligence (“AI”) systems or models when such J.P. Morgan Data is accessible by a third-party. It is permissible to use J.P. Morgan Data for internal business purposes only in an AI system or model that protects the confidentiality of J.P. Morgan Data so as to prevent any and all access to or use of such J.P. Morgan Data by any third-party.