American bank stocks are on track to reach a new high in 2022! Hedge funds are aggressively buying in.

Notice that American bank stocks are on a strong upward trend, with hedge funds aggressively buying their stocks at a frantic pace, highlighting Wall Street's increasing confidence that this record-breaking rally still has room to go. Data from Goldman Sachs' bulk brokerage business shows that the net buying volume of short-term funds last week reached a nearly decade-high. This optimistic sentiment, coupled with the prospect of interest rate cuts stimulating loan businesses, and the Federal Reserve announcing that all large banks have passed the annual stress test, pushed the S&P 500 financial sector to a historical high on Monday. Analysts and traders tracking financial stocks are enthusiastic about the industry. UBS Group has identified large bank stock portfolios as their preferred trading tool to participate in the current stock market rally. Star analyst Mike Mayo from Wells Fargo predicts that bank stocks will continue to rise, and the Bank of America analyst team also shares the same view. Analysts led by Ibrahim Punawala at Bank of America wrote that the Federal Reserve stress test results will "inject a shot in the arm for the entire industry." This is a rebound that many investors have been waiting for since Trump's reelection in November last year, when the market widely expected a wave of deregulation and pro-business policies in the banking industry. However, the industry experienced a setback briefly before Trump initiated a global trade war in April. The KBW Bank Index, which tracks large US banks, has rebounded by over 30% from its April low, but is still 5.4% below its peak in 2022. More positives There are more positive factors to come, including regulatory reforms in the banking industry to possibly relax capital and leverage requirements. "This could be a major change - if capital requirements are lowered, the profit margins of bank loan businesses will improve, possibly motivating them to lend more actively," said Gerald Cassidy, head of US bank stock strategy at RBC Capital Markets. The US financial sector is currently his top pick globally. Cassidy anticipates new policies to be enacted in the second half of 2025, allowing banks to more aggressively manage loan portfolios from the end of this year until 2026. Federal Reserve policy is also expected to become more accommodative. While higher interest rates are generally positive for banks, the expectation of rate cuts this year will boost the economy, potentially activating banks' trading businesses. Cassidy believes that when banks renegotiate fixed-rate loans issued during the pandemic at ultra-low interest rates, they will be able to reprice them at more favorable rates. "Bank asset yields are rising, while funding costs are declining," Cassidy added. Earnings season approaching Of course, not all factors are positive. After nine consecutive quarters of profit growth, the financial sector is expected to show zero growth this quarter. JPMorgan Chase, Citigroup, and Wells Fargo are scheduled to announce their earnings on July 15, kicking off the earnings season. Nevertheless, options traders are still betting on the stock prices to continue to rise. The bullish-to-bearish option ratio for the main ETF focusing on large financial stocks, the Financial Select Sector SPDR Fund (XLF), is hovering near a four-month high. "The relaxation of regulations and low implied volatility in the industry are fueling strong interest in the rally of bank stocks," said Daniel Kilgore, head of options trading at Pipersandler.