Can the Big Bank Rally Sustain as Rate Cuts Loom?

The Federal Reserve’s rate-cut cycle, which began in late 2023 and continued through 2025, has reignited investor interest in bank stocks. Historically, the S&P 500 Banks Index has shown resilience during rate-cut periods, with reduced borrowing costs and improved net interest margins (NIMs) often boosting profitability [1]. However, the current environment is far from textbook. Elevated inflation, geopolitical tensions, and aggressive trade policies are creating a complex backdrop that could test the sustainability of the recent bank stock rally.

Historical Parallels: A Mixed Bag

While rate cuts typically benefit banks by widening NIMs and stimulating lending, the outcomes depend heavily on the economic context. During the 2008 financial crisis, for example, the Fed slashed rates to near-zero, but banks initially underperformed due to collapsing asset prices and credit quality [1]. It was only after liquidity injections and market stabilization that ROE and ROTCE rebounded. In contrast, softer slowdowns—such as the 2019 rate cuts—saw more consistent gains, as lower rates spurred economic activity without triggering widespread defaults [1].

The current rate-cut cycle (2023–2025) has shown mixed results. Despite the Fed reducing rates by 50 basis points in September 2024 and another 25 basis points in May 2025, the S&P 500 Banks Index has risen modestly, outperforming the broader market but remaining volatile [1]. This reflects the Fed’s cautious approach: with core PCE inflation still at 2.8% and a strong labor market, policymakers are hesitant to overcommit to aggressive cuts [2].

Earnings Momentum: Strong Q2 Results, But Can It Last?

Recent quarterly reports from major banks suggest short-term optimism. JPMorgan Chase, for instance, reported Q2 2025 earnings of $5.24 per share, surpassing estimates by 17%, driven by a 14% surge in fixed income trading revenue and a 7% increase in investment banking fees [3]. Citigroup also outperformed, with EPS of $1.96 (up 22% year-over-year) and a 16% rise in Markets division revenue [4]. These results highlight the sector’s ability to capitalize on market volatility and M&A activity.

However, sustainability remains uncertain. Analysts project JPMorgan’s Q3 2025 EPS at $4.63, a slight dip from Q2, while Citigroup’s guidance is more cautious, with full-year revenue capped at $84 billion [5]. The challenge lies in balancing near-term gains with long-term risks. For example, Bank of America’s Q2 earnings, though strong in trading (15% growth), saw a 9% decline in investment banking fees, underscoring sectoral fragility [3].

Macroeconomic Risks: Tariffs, Inflation, and Geopolitical Uncertainty

The Fed’s rate-cut path is being shadowed by macroeconomic headwinds. Tariffs imposed under the Trump administration have disrupted global supply chains, increasing costs for manufacturers and consumers. This has led to higher credit costs for banks, with provisions for credit losses projected to rise to 26.5% of net revenue in 2025 [6]. Commercial real estate, in particular, faces elevated delinquency risks as businesses struggle with inflation-adjusted pricing [1].

Geopolitical tensions further complicate the outlook. J.P. Morgan Research warns that oil shocks and trade disputes could amplify macroeconomic volatility in the second half of 2025 [4]. While a weaker dollar benefits multinational firms, it also raises import costs, squeezing margins in rate-sensitive sectors like utilities and real estate [2]. The Fed’s data-dependent approach—keeping rates in a 4.25%–4.50% range—reflects its balancing act between inflation control and economic growth [2].

Conclusion: A Delicate Balance

The big bank rally appears supported by strong earnings and a Fed committed to gradual rate cuts. Yet, the sector’s long-term health hinges on navigating macroeconomic risks. Tariffs and geopolitical tensions are likely to keep credit costs elevated, while inflationary pressures may delay the full benefits of lower rates. For now, investors should monitor key metrics: NIM trends, credit quality, and the Fed’s response to trade policy shifts.

Source:
[1] How Stocks Historically Performed During Fed Rate Cut Cycles [https://www.northerntrust.com/japan/insights-research/2024/point-of-view/how-stocks-historically-performed-during-fed-rate-cut-cycles]
[2] Fed to keep rates steady as tariffs, possible oil shock counter inflation data [https://www.reuters.com/business/fed-expected-keep-rates-steady-tariff-risks-outweigh-inflation-data-2025-06-13/]
[3] JPMorgan Chase (JPM) earnings Q2 2025 [https://www.cnbc.com/2025/07/15/jpmorgan-chase-jpm-earnings-q2-2025.html]
[4] Citigroup (C) Q2 2025 Earnings Call Transcript [https://www.fool.com/earnings/call-transcripts/2025/07/15/citigroup-c-q2-2025-earnings-call-transcript/]
[5] JPMorgan Chase & Co. (JPM) Analyst Ratings, Estimates [https://finance.yahoo.com/quote/JPM/analysis/]
[6] Impact of Trump's Tariffs on US Banking Sector [https://www.acuitykp.com/blog/trump-tariffs-impact-us-banking-sector/]