US Bank Bullish Outlook Revisioned by KBWB Amid Cyclicality Traps

Invesco KBWB is backing out of its bullish outlook on US banks due to cyclicality traps, where investors often chase late-stage gains amid positive feedback, asymmetrical liquidity, and late-stage earnings momentum. The fund manager believes that this can lead to overvaluation and eventual decline in the asset class.

Invesco has revised its outlook on US banks, specifically the Invesco KBW Bank ETF (NASDAQ: KBWB), from overweight to underweight, citing concerns over cyclicality traps [1]. This shift reflects a broader view that investors often chase late-stage gains in asset classes, leading to overvaluation and eventual decline.

The KBWB ETF, which tracks the KBW Nasdaq Bank Index, has delivered around 30% year-over-year price gains. However, Invesco believes that the ETF will face headwinds in late 2025 and early 2026. The decision to downgrade the outlook is based on several factors, including a potential cyclical peak in the banking sector, where banks have prepared for a period of lower demand [1].

One key concern is the growth in deposits among US banks, which, while indicating better liquidity, does not necessarily signal better performance. Instead, it could suggest a cyclical peak where banks have accumulated funds for a period of lower demand. This view is supported by recent data showing a decline in median loans and leases since Q2 2024, as well as an increase in delinquency rates [1].

Moreover, Invesco highlights that non-interest income (NII) could provide latent support to the sector, driven by increased M&A deal value and volumes, as well as fee-based income. However, the fund manager remains cautious about the sustainability of this support, particularly in the context of a tentative view on public equity markets and short-term funding rates [1].

The ETF's exposure to mega banks and borderline valuation metrics adds to the cyclicality concerns. Bank stock valuation multiples are currently high, with dividend yields compressed. This makes the sector less favorable for new investors, as potential returns may not justify the risk [1].

Additionally, Invesco points to the potential risks from the mortgage market, where high interest rates have led to unrealized losses on held-to-maturity (HTM) securities. The four largest US banks—JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup—collectively face $172.28 billion in unrealized losses as of March 31st, 2025 [2]. These losses are expected to persist, further complicating the outlook for the sector.

In summary, Invesco's downgrade of KBWB reflects a cautious view on the cyclical nature of bank stocks, driven by concerns over valuation, dividend yields, and the broader economic environment. Investors should carefully position their portfolios in light of these factors.

References:
[1] https://seekingalpha.com/article/4801448-kbwb-backing-out-of-a-bullish-outlook-on-us-banks
[2] https://www.ainvest.com/news/banks-face-172-28-billion-unrealized-losses-due-high-interest-rates-2507/