Wall Street Wakens – Financial Stocks are Breaking Out after Decades in the Shadows

It may have taken nearly two decades but financial stocks are set to “come back to life” wooing both long in the tooth and newbie investors alike.

According to David Russell, Global Head of Market Strategy at online brokerage TradeStation, there are a number of catalysts powering banking and financial stocks forward and, perhaps, taking some of the limelight away from growth stocks including the Magnificent Seven.

“The market has been fixated on growth stocks for almost a decade. Some younger investors may be surprised to see the potential impact of other catalysts like dealmaking and underwriting securities. The global financial crisis (GFC) was a long time ago. Wall Street could finally come back to life,” he said.

Some of that confidence is likely to be highlighted in the second-quarter earnings season, which is due to begin next week and include banking heavyweights such as JPMorgan Chase (JPM), Citigroup (C), Wells Fargo (WFC) and Bank of America (BAC).

Banks are expected to reveal a boom in market and trading revenues when they report. That, say analysts, has been helped by the volatility and uncertainty caused by President Trump’s shifting tariff strategy.

“Volatility is the friend of markets revenue,” said Mollie Devine, head of markets competitor analytics at Crisil Coalition Greenwich. “Some of the tariff announcements were a positive catalyst for trading desks.”

Indeed, in a recent report on global banks Crisil said they are expected to report a 10% gain in markets revenue as traders placed their bets on shifting U.S. tariff policies.

Equities revenues are expected to climb by 18% in the second quarter, while bonds would climb 5% compared with the previous year.

Investors are already getting excited with signs of a breakout in the SPDR Select Sector Financial ETF (XLF) weekly chart.
https://www.tradingview.com/chart/XLF/TVmu2XzD-Pre-Earnings-Breakout-in-Financials/

JPM stock is also up nearly 30% in the last three months with WFC 32% higher and seeing a surge in volumes from option traders.
https://www.tradestation.com/insights/2025/07/02/wells-fargo-calls/

Russell said investors could be in line for greater buybacks and dividends as Wall Street’s glow is restored.

One key catalyst was the recent Federal Reserve Board annual bank stress tests which showed that large banks are well positioned to weather a severe global recession, while staying above minimum capital requirements and crucially being able to lend to American families and businesses.

Terry McEvoy, bank analyst at Stephens Inc said: “Both capital and reserves, which are the true loss cushion for the banking industry, are very healthy today.”

Indeed, the credit outlook for banks is solid. Bank’s loan loss reserves – which are in place to cover losses from defaulted loans – have been on the up despite tighter junk bond spreads. That usually indicates a lower risk of default and a sign of a more positive economic outlook.

That didn’t appear to be the case just a month ago when JP Morgan boss Jamie Dimon said there was a chance that economic numbers “will deteriorate soon.” He said employment would come down a little bit and inflation would go up a little bit.

Russell said: “That might have been peak gloom. Look at the strong payroll numbers in early July.”

Other sector catalysts include Net interest margins (NIM) which have continued to improve at U.S. banks in the first quarter of this year. These measure the difference between the interest a bank earns from its investments, such as loans, and the interest it pays out on the deposits of ordinary people.

The 2s to 10s yield curve, which is the difference between 2-year, and 10-year Treasury yields, and which is the steepest it’s been since 2022, has a huge influence on NIM. The recent stabilization of the curve around 50bp after a long period of inversion, means that banks can borrow at lower short-term rates for deposits and lend at higher long-term rates. This can potentially increase their NIMs.

Other positive factors behind a potential Wall Street revival include greater stock trading, a resurgence in IPOs and M&A. Analysts at Morgan Stanley predicted a “capital market re-mergence” based on these catalysts in early July.

According to data from Dealogic, in the first half of this year 174 companies raised over $31 billion from U.S. IPOs. That’s the most since 2021.

Those that have taken to the stage have performed well notably cloud computing firm CoreWeave (CRWV), whose shares are up five-fold since listing in March. Stablecoin issuer Circle Internet Group (CRCL) has seen its share price double since its June debut.

U.S. M&A volume has already topped $989 billion so far in 2025. That’s the highest level since 2021.

Notable recent deals include the $10 billion acquisition of biopharmaceutical firm Verona Pharma (VRNA) by pharmaceutical giant Merck (MRK). As tasty is the news this week that cereal maker WK Kellogg could soon be eaten up by chocolate maker Ferrero in a $3 billion takeover.

Having more assets under management in this environment could also lift related financial stocks such as BlackRock (BLK), MSCI (MSCI) and Ameriprise Financial (AMP).

Overall, Russell said that interest rate cuts, the fading risk of a recession, the currently low valuations in the sector and re-risking post the GFC provide a solid backdrop to financial stocks.

The trend of over-regulation and extreme caution post the financial crisis is now being eased, he said.

U.S. banks can also take inspiration from their European peers with firms like HSBC (HSBC), UBS (UBS) and Banco Santander (SAN) performing strongly despite weak economies in the EU.

“Banks have been through the wringer of higher rates and an inverted yield curve. They’re emerging in an environment that could be more favorable as borrowing costs moderate. Headwinds could be turning into tailwinds,” Russell said.