Regional Bank Stocks Facing Challenges: When to Buy?

The SPDR S&P Regional Banking exchange-traded fund has been struggling this year, down 11% to just under $47. Despite topping $50 several times, the ETF has been unable to sustain its gains and has lagged behind the broader market rally. The equal-weighted S&P 500, which excludes the influence of Big Tech, is up 4% in comparison.

One of the main challenges facing regional banks is the widening gap between short-term and long-term interest rates. This has put pressure on lenders’ profit margins as they borrow short-term funds to make longer-term loans. Additionally, slowing economic growth and the Federal Reserve’s reluctance to cut rates due to inflation concerns have added to the sector’s woes.

Analysts expect a 7% decline in aggregate sales for banks in the ETF this year, with earnings growth expected to be moderate as banks focus on cost-cutting measures. However, without a significant change in macroeconomic factors, such as rate cuts or improved revenue growth, earnings growth may remain subdued.

Investors are advised to exercise caution when considering regional bank stocks, as the ETF remains below its 200-day moving average and could see further declines. While the stocks are currently trading at a relatively low forward price/earnings multiple, they could become even cheaper if profit concerns persist.

Despite the current challenges, some analysts believe that eventual rate cuts could provide a much-needed boost to bank stocks. Investors are advised to keep an eye on potential catalysts for growth before considering buying into the sector.

In conclusion, while regional bank stocks may present an opportunity for investors, it may be wise to wait for better prices before making any significant investments. For more insights on this topic, you can reach out to Jacob Sonenshine at jacob.sonenshine@barrons.com.