The bull market in US stocks is being passed to mid-sized banks: the S&P Regional Bank Index has surged, with analysts shouting that there is still room for further growth.

Regional banks in the United States are receiving a boost from the bull market, as investors believe that even as the overall momentum weakens, this trend will continue. The S&P Regional Banks Select Index covers banks such as Pathward Financial (CASH.US) and Metropolitan Bank Holding (MCB.US), and is poised to outperform the S&P 500 Index for the third consecutive month, making it the longest winning streak since 2022. The valuation multiples of the index's components are still lower than their long-term average levels, leaving room for further upside if earnings remain strong. Around 10% of the index's components will report earnings in the next two days. Other factors are also boosting investor confidence. Strategists at 22V Research state that the continued growth of the U.S. economy has reduced the relative attractiveness of larger lending institutions with more robust balance sheets, making them more bullish on small banks. The steepening yield curve and expectations of increased merger activity are also favorable for the industry. Chief Investment Officer and Senior Portfolio Manager Joshua Schachter of asset management company Easterly Snow stated, "Regional banks may be the cheapest sector in the market, which can be seen from various indicators. There are many commendable stories within regional banking, and now these stories are bearing fruit." The $4 billion-State Street SPDR S&P Regional Bank ETF has increased by 4.6% this year, outperforming the S&P 500 Index's 1.9% gain and reaching its highest level relative to broader financial benchmarks since 2024. This breakthrough performance of a sector closely tied to U.S. consumers sends a positive signal to the broader stock market. Previously, the market rally was mainly driven by the artificial intelligence trading frenzy, only seeing a pullback last November. Schachter's optimism towards regional lending institutions is closely tied to the steepening of the U.S. Treasury yield curve. A steepening yield curve refers to a situation where long-term interest rates rise faster than short-term rates. This benefits lending institutions as the interest spread between long-term loan rates and deposit rates widens. Schachter also noted that deregulation, changes in corporate tax rates, and the trend of smaller banks being acquired by larger competitors are positive catalysts. However, not all investors are as certain. Jonathan Coleman, Portfolio Manager of the U.S. Small and Mid Cap Growth team at Janus Henderson Investors, believes that technology stocks offer more exciting investment opportunities in small-cap stocks as they are better positioned to benefit from the growth of artificial intelligence. Coleman stated, "We like companies with a differentiated value proposition." He added that he prefers to "avoid" local banks that have essentially operated on the same business model for decades. He also mentioned that other potential adverse factors faced by small banks include the Trump administration's support for stablecoins, increasing the risk of their deposits being moved to the digital asset space. For some, the resurgence of U.S. economic growth momentum may further boost the stock prices of small lending institutions. Data released earlier this month showed that the U.S. GDP growth rate for the third quarter was revised to 4.4%, marking the fastest pace in two years. Federal Reserve Chairman Powell also emphasized the "marked improvement" in the U.S. economic outlook for the coming year, while policymakers announced maintaining interest rates unchanged. Bill Hebel, a strategist at 22V Research, stated that the fundamentals of regional banks this quarter are "solid," and relative valuations remain attractive. He also added that compared to larger banks more susceptible to political pressure to lower credit card rates, regional banks are performing better. Strategists at 22V Research, including Hebel, wrote in a report to clients, "The rationale for paying a premium for capital markets and credit card exposure, as well as for expanding the balance sheet to hedge specific credit risks, has weakened. So far, there has been almost no mention of credit conditions in financial reports, which in itself indicates a diminishing concern about the risk of an economic recession."