Bank stocks rise as investors await election results

Bank stocks rose a bit on Tuesday along with the stock market as investors brushed off a potentially prolonged week of U.S. election results and instead focused on fresh economic data.

The S&P 500 index rose roughly 1% on Tuesday, with bank stock indexes rising by a similar amount. The slight gains came as voters cast ballots to decide a key uncertainty for the market: who will be the next U.S. president. 

Banks were performing in line with the broader market on Tuesday, with the KBW Nasdaq Bank Index rising 1%. The index has surged 25% this year, as the Federal Reserve has started to cut interest rates and worries over a looming recession have eased.

Investors are "waking up to the fact that it's not Armageddon," said Kevin Gordon, a top investment strategist at Charles Schwab, adding that the sharp downturn where banks "tend to get smacked the hardest" seems unlikely soon. Banks did report some worsening in their loan portfolios last quarter, but their balance sheets remain "relatively solid" overall, Gordon said.

More upside is possible, he added, noting banks perform well under periods of "sustained expansion" where the Fed is taking gradual actions rather than slashing interest rates to forestall a recession.

Polls in key swing states have shown a tight race between Vice President Kamala Harris and former President Donald Trump. But investors seemed heartened by a separate poll — that of service-oriented businesses surveyed by the Institute for Supply Management.

The ISM's services index, a measure of economic activity in the sector, expanded for the fourth consecutive month and was at its highest level since July 2022. The index rose to 56% last month, up from September's 54.9% reading.

"That basically reassured investors that the economy is still strong," said Irene Tunkel, the chief U.S. equity strategist at BCA Research.

The strong ISM report helped tamp down any worries after Friday's news that U.S. employers added only 12,000 jobs in October. Economists had attributed the unusually weak report to hurricane-related disruptions and a Boeing employee strike.

Tuesday's ISM report was yet another example of "relatively resilient economic data," Gordon said. 

But near-term volatility may also be at hand, particularly if the election results are too close to be called by the time markets open on Wednesday, Tunkel said.

"The market thinks that the economy is good," Tunkel said. But "what it wants the most is that election uncertainty gets lifted," she added.