Banks were the sector to be in last year — and may be in 2026, too, says JPMorgan
After a bruising reset in 2023, bank stocks turned into quiet leaders last year as the rate backdrop steadied, credit stayed broadly resilient, and capital markets reopened. JPMorgan’s strategists argue the setup remains favorable into 2026, with fundamentals improving, valuations still undemanding versus the broader market, and regulatory clouds beginning to thin.
What drove the turn last year
Several tailwinds converged to lift the group:
– A friendlier rate mix. The extreme yield-curve inversion began to ease, stabilizing net interest margins and improving the marks on securities portfolios that had been pressured when rates spiked. Slower, more telegraphed policy moves reduced the whiplash in deposit pricing.
– Better fee engines. Investment banking, equity issuance, and M&A recovered from multi-year lows, while markets activity held up. That helped universal banks and broker-dealers post healthier, more diversified revenue.
– Credit normalizing, not cracking. Charge-offs rose from unusually benign levels but remained manageable outside of pockets like office commercial real estate and subprime consumer. Reserve builds were targeted rather than broad-based.
– Capital return returned. With stress test outcomes clearer and capital ratios rebuilt, many large banks leaned back into buybacks and steady dividends, supporting total return even as earnings growth moderated.
Why JPMorgan thinks 2026 could rhyme
JPMorgan’s case for banks in 2026 rests on three pillars: earnings visibility, capital deployment, and multiple support.
– Earnings visibility. A less inverted or modestly steepening curve tends to be constructive for spreads and for the valuation of bond portfolios. If policy rates drift down gradually rather than collapse, banks can reprice assets and liabilities with fewer shocks. On the fee side, even a mid-cycle capital-markets tape—more IPOs, an open investment-grade window, and a thaw in M&A—supports the largest franchises. Expense discipline and technology reuse are tailwinds to operating leverage.
– Capital deployment. With common equity tier 1 cushions above regulatory minimums and more clarity on the timing and shape of final capital rules, management teams can continue buybacks at attractive multiples and grow dividends in line with earnings. For many names, capital return remains a larger share of the equity story than pure top-line acceleration.
– Valuation. Despite the rebound, many banks still trade at discounts to the market on price-to-earnings and at modest premiums to tangible book where returns are sustainably above the cost of equity. If returns on tangible common equity settle in the low- to mid-teens and volatility remains contained, there is room for rerating.
Subsector nuances matter
– Global universals and broker-dealers. The beneficiaries of a healthier deal calendar and steady trading backdrop, these firms also possess low-cost deposit bases and diversified funding. They stand to gain from improved capital efficiency if final rulemaking proves less onerous than initial proposals.
– High-quality large regionals. Those with granular, low-cost deposits and limited office CRE exposure have rerated, but could still compound via cost takeout, targeted loan growth in specialty areas, and resumed buybacks. Balance-sheet mix and deposit beta management remain key differentiators.
– Niche and specialty finance. Select lenders in cards, auto, and equipment finance can grow through the cycle, but face the sharpest credit normalization. Investors will reward underwriting discipline and pricing power.
– Community banks. Valuations look optically low in places, yet funding costs and commercial real estate concentrations make the path more idiosyncratic. Consolidation could be a catalyst where governance and capital permit.
What could go wrong
– A hard landing. A sharper-than-expected slowdown would elevate unemployment and push loss rates higher across consumer and small business, forcing reserve builds and pressuring earnings.
– “Higher-for-even-longer.” If inflation re-accelerates and policy must tighten again, funding costs could rise, deposit migration could reappear, and securities marks could deteriorate, weighing on capital flexibility.
– Commercial real estate stress. Office remains the pressure point. Reappraisals and refinancing walls can produce lumpy losses, particularly for lenders with concentrated exposures or thin loan-level cushions.
– Regulatory surprise. If final capital or liquidity rules arrive quicker or tougher than expected, buyback capacity and returns math would need to reset, especially for the largest institutions.
– Cyber and operational risk. Heightened threat levels and third-party dependencies can create unexpected events that drive both costs and reputational risk.
Signals to watch in 2026
– The shape of the yield curve and deposit betas. A gently steepening curve with stable deposit costs is the sweet spot.
– Fed path and credit spreads. Gradual policy adjustments and contained spreads correlate with smoother repricing and healthier fee pools.
– Stress test outcomes and final capital rules. Clarity on stress capital buffers and any tweaks to market risk or operational risk frameworks will determine buyback pacing.
– Delinquency trends in consumer and CRE. Signs of stabilization—especially in office—would be a material relief for regional banks.
– Capital markets pipelines. Sustained IPO and M&A activity validate the fee recovery and support universal bank earnings breadth.
The bottom line
After surprising skeptics last year, banks still have a credible case as core cyclical exposure into 2026, according to JPMorgan. The combination of improving rate dynamics, durable fee contributions, disciplined credit, and stepped-up capital return can support both earnings and multiples. Selectivity remains essential—funding mix, credit concentration, and capital flexibility will separate winners from laggards—but as a group, the sector’s risk-reward looks better balanced than at any point since before the regional banking turmoil.
As always, investors should match exposures to their risk tolerance and time horizon and consider the full spectrum of risks alongside the potential for further normalization and rerating.
