The S&P 500 had an excellent first half of 2024, producing a 15.3% total return for investors in that six-month period. And while some of the best performing components in the market, such as AI-focused tech stocks, are well-known, you might be surprised to learn that most big banks also delivered market-beating returns.
In the first half of 2024, Bank of America (NYSE: BAC) , Goldman Sachs (NYSE: GS) , and JPMorgan Chase (NYSE: JPM) delivered total returns of 19.7%, 18.8%, and 20.3%, respectively. But I think they could outperform for the rest of 2024 and into 2025 as well.
Why have bank stocks performed so well?
To be sure, a fair amount of the outperformance can be attributed to a rebound from a very turbulent 2023 for the banking industry. Investors turned extremely cautious on the banks in the wake of several high-profile bank failures, and while the big banks fared better than most, 2023 was generally a year of underperformance (with the exception of JPMorgan Chase, but that's a whole different story).
Beyond that, bank stocks have performed well in 2024 for a few general reasons. We're seeing investment banking activity, such as M&A and IPO advisory, pick up sharply from a lull in recent years. Plus, consumer spending is generally holding up better than many had expected. Credit quality has held up quite well also, as default rates have gone from spiking throughout 2023 to more plateau-like behavior in most cases.
Several big catalysts ahead
Although these three bank stocks have performed well so far in 2024, it could be just the beginning of a longer-term trend. After all, there are several catalysts that could continue to drive outperformance.
Interest rates are the big one, as net interest margins have been under pressure recently. For example, in Bank of America's case, the metric has steadily declined from 2.65% to 2.41% over the past year.
The short explanation is that while loan interest rates have increased, many of the loans held on banks' balance sheets were originated before the current rate-hike cycle. Meanwhile, banks have to pay higher interest rates on all of their deposits. In simple terms, yields from loans have grown slower than the cost of deposits. But with three Federal Reserve rate cuts expected this year and at least three or four more expected in 2025, this trend could certainly reverse course.
Falling interest rates help banks in other ways. They can stimulate lending demand as well. For example, almost nobody is refinancing their mortgage right now, but if rates fall by one or two percentage points, that could certainly change.
Investment banking could be another major catalyst. While we've already seen an uptick in M&A activity and equity and debt issuance, it remains low from a historical perspective. While 2020 and 2021 were outliers, there were at least 217 IPOs per year from 2017 to 2019. We're on pace to have about 185 in 2024, so there's still some catching up to do.
Great long-term investments
The point is that there's a solid case to be made that bank stocks like these three could continue to outperform for the rest of the year and beyond. That's especially true if we get the interest rate cuts that are expected, credit quality holds up, and consumer spending and loan demand is strong.
Having said that, it's important to realize that all of these are big "ifs" and there's no guarantee that the rest of 2024 will play out like that. However, these are three highly profitable and well-run banks that are in an excellent position to thrive once interest rates start to normalize, and all could be excellent long-term investments at the current levels.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Matt Frankel has positions in Bank of America. The Motley Fool has positions in and recommends Bank of America, Goldman Sachs Group, and JPMorgan Chase. The Motley Fool has a disclosure policy .
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