Bank stocks rally on solid jobs data, but can it last?

Michael Nagle/Bloomberg

Bank stocks rallied Friday following another favorable jobs report that indicated the U.S. economy remains on firm footing following a year of high interest rates that had threatened to cause a recession.  

The KBW Bank Index closed trading up nearly 2% on Friday, easily outpacing the broader S&P 500 gain of 0.2%.  

Bank stocks finished 2023 nearly flat — hampered by credit quality concerns and high deposit costs tied to Federal Reserve rate hikes meant to tame consumer costs in the wake of the pandemic. But the Fed proved successful in cutting inflation in half over the course of last year and the economy remained resilient. 

That bodes well for borrowers' ability to make loan payments and may diminish the potential for credit losses this year. It also could result in improved confidence in the economy among consumers as well as business owners, and this in turn could bolster loan demand that could boost profitability for banks after anemic growth in 2023.  

"There are a few vital signs" to "monitor when trying to diagnose the health of the economy, and the labor market is a crucial one," said Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown. 

Friday's Labor Department report showed U.S. employers added 216,000 jobs last month, closing out a robust year of hiring. It was an increase from November's gain of 173,000, and it was roughly in line with the monthly average for 2023 — about 225,000. 

The December jobless rate held at 3.7%, even with the prior month and up slightly from 3.4% at the start of 2023. It remained near a 50-year low. Wages increased 4.1% last month from a year earlier. 

The job market's durability, however, may delay much-anticipated rate cuts in 2024. As long as employers are aggressively hiring — and paying up to attract talent — inflationary pressures could persist and policymakers may leave rates at elevated levels for several more months. This would continue to put upward pressure on banks' deposit costs and could keep a lid on loan demand because customers may wait on the sidelines until borrowing costs come down.  

"The data has short-term implications, but the bigger question looks to the future," Lund-Yates said. "There's every chance the Federal Reserve will demand a run of softer macro readings before hitting the rewind button on rates." 

Meager loan growth and lingering high deposit costs could keep bank profits in check and, by extension, push investors to other sectors. 

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U.S. banks with less than $10 billion of assets, for example, posted sequential third-quarter loan growth of just 1.9%, according to S&P Global Market Intelligence data. That was down from 3.5% a year earlier. At the same time, these lenders' median cost of deposits climbed to 1.44% in the third quarter, up from 0.33% a year earlier.  

Those lackluster figures continued the trend from the first half of 2023. If such results spill into this year, they could dampen bullish sentiment among investors, said Mike Matousek, head trader at U.S. Global Investors. 

"We may be peaking here early in the year," he said. "You have to be cautious" because "there may be little rally gas left in the tank until we actually see rate cuts."