Forget Tech. Big Banks Could Be the New Momentum Stocks, Veteran Investor Says

As we head into 2025, the tech sector has been the darling of the stock market, with many investors reaping the benefits of its impressive run. However, a veteran investor suggests that big banks could be the new momentum stocks, offering attractive opportunities for those willing to look beyond the tech sector. Let's explore the reasons behind this assertion and the factors driving momentum for big bank stocks.

1. Improving Interest-Rate Environment: The veteran investor expects an improving interest-rate environment for banks, which can lead to higher net interest income. This is supported by the KBW Nasdaq Bank Index (BKX) returning 11.4% during the fourth quarter of 2024, even as the S&P 500's return slowed to 2.4% for the same period. A more favorable interest-rate environment can boost banks' earnings and share prices.
2. Lighter Regulatory Burden: The investor anticipates a lighter regulatory burden for banks, which can boost their earnings and share prices. This is exemplified by Citigroup Inc. (C), which still trades at a low price-to-tangible book value ratio and could benefit from a change in the regulatory landscape under a Trump administration.
3. Strong Earnings Growth: The investor highlights the strong earnings growth of big banks in 2024, with the six largest U.S. banks returning between 37.7% and 50.2% over the past year. This is supported by the table showing the one-year returns, P/E ratios, P/TBV ratios, and dividend yields for these banks.
4. Attractive Valuations: The investor points out that some big banks, like Citigroup, are still cheaply priced, trading at low P/E ratios and P/TBV ratios. This suggests that these banks may be undervalued and have room for further growth.

These factors combined make big banks attractive momentum stocks in the current market environment, according to the veteran investor. However, it's essential to consider the role of interest rates and the yield curve in driving momentum for big bank stocks.

Interest rates and the yield curve play a significant role in driving momentum for big bank stocks. Rising interest rates can lead to increased net interest income (NII) as banks can charge more for loans. Conversely, falling interest rates may lead to decreased NII. The yield curve also impacts NII, with a normal yield curve leading to higher NII and an inverted yield curve leading to lower NII.

Investment banking and trading activities can also be influenced by interest rates and the yield curve. Rising interest rates can lead to increased trading and investment banking activities, while falling interest rates may lead to decreased activity. The yield curve can also impact these activities, with an inverted yield curve leading to decreased refinancing activity.

Valuations of big bank stocks can be impacted by interest rates and the yield curve. When interest rates are low, and the yield curve is flat or inverted, banks may trade at lower P/E and P/B ratios. Conversely, when interest rates are high, and the yield curve is normal, banks may trade at higher P/E and P/B ratios.

Looking ahead, the evolution of interest rates and the yield curve will depend on various factors, including economic growth, inflation, and monetary policy. If the economy continues to grow, and inflation remains under control, the Federal Reserve may continue to lower interest rates, leading to a more accommodative monetary policy. This could lead to increased momentum for big bank stocks, as banks may benefit from higher NII, increased investment banking and trading activities, and higher valuations. However, if the economy slows down, or inflation picks up, the Federal Reserve may raise interest rates, leading to a less accommodative monetary policy. This could lead to decreased momentum for big bank stocks, as banks may face lower NII, decreased investment banking and trading activities, and lower valuations.

In conclusion, big banks could be the new momentum stocks in the current market environment, driven by an improving interest-rate environment, lighter regulatory burden, strong earnings growth, and attractive valuations. However, investors should closely monitor interest rates and the yield curve, as these factors play a crucial role in driving momentum for big bank stocks. As these factors evolve in the near future, investors should make informed decisions about investing in big bank stocks based on the latest economic indicators and monetary policy developments.