The Real Reason Bank Stocks Are Crushing the Mag-7 This Year

The financial sector just delivered a knockout punch to tech darlings. Big bank stocks are absolutely dominating in 2024, with Citigroup jumping 62% and Goldman Sachs surging 59%—numbers that make most Mag-7 stocks look ordinary by comparison. Only Alphabet manages to keep pace with the banking rally.

What’s Driving This Historic Bank Stock Surge?

The turnaround hinges on three pillars: revived deal-making, robust corporate spending, and consumer strength that refuses to crack. M&A and IPO activity have roared back to life, injecting fresh deal fees into bank coffers. The six largest U.S. banks collectively raked in nearly $41 billion in profit during Q3—a 19% year-over-year jump—as revenues and earnings both shattered Wall Street’s expectations.

But there’s more to the story than just balance sheet strength. Trading desks are thriving thanks to an energized stock market, and loan portfolios remain surprisingly healthy despite macro headwinds. Banks aren’t just surviving; they’re actually benefiting from a resilient consumer base and steady corporate borrowing appetite.

The Regulatory Tailwind Nobody Expected

Here’s the game-changer: the political landscape just shifted dramatically in favor of financial institutions. Lighter regulatory scrutiny under the new administration is replacing years of aggressive oversight, and banks are already celebrating the impact. Relaxed capital requirements have provided an immediate boost to valuations, giving investors fresh reasons to buy.

Meanwhile, Big Tech isn’t the only sector where AI is creating winners. Major banks are leading their own AI adoption wave—and they’re not just experimenting. Cost savings and measurable efficiency gains are already flowing to bottom lines, setting the stage for sustained earnings growth.

The Regional Banking Reality Check

Not all banks are created equal. Regional banks tell a very different story. Many carry excessive exposure to commercial real estate—a sector under genuine pressure—and their stock performance reflects that vulnerability. October delivered a brutal selloff when fraud-related bankruptcies at subprime auto lender Tricolor Holdings and auto-parts supplier First Brands Group triggered fresh charge-offs and contagion fears.

Regional banks lack the diversified revenue streams and trading expertise of their money-center peers, leaving them exposed when credit stress accelerates.

What’s Ahead: Rate Cuts Could Amplify the Rally

The Fed’s recent rate cuts and potential additional moves in 2025 create an interesting inflection point. If the economy stays resilient and the yield curve steepens, banks could see net interest margins expand while loan demand accelerates—the ideal scenario for profitability. This environment would reward the largest, most diversified institutions while continuing to pressure regional players.

Bank CEOs remain cautious about one element: a softening labor market that could squeeze lower-income households. Stress in that segment could eventually ripple through loan portfolios, though early warning signs aren’t flashing red yet.

Playing the Bank Stock Rally: Your ETF Options

For investors seeking broad exposure, the Financial Select Sector SPDR Fund (XLF) offers the largest platform in the space at attractive valuations. Its top holdings include Berkshire Hathaway and JPMorgan—a combination of insurance/investment strength and pure banking leverage.

The Invesco KBW Bank ETF (KBWB) provides a different angle, concentrating on money center banks, regional institutions, and thrift operators with performance that’s led the sector over the past year.

Those specifically targeting regional bank exposure should consider the SPDR S&P Regional Banking ETF (KRE), which tracks an equal-weighted regional index. Just remember: regional banks come with their own risk profile and aren’t participating in the big bank rally.

The math is simple: when you compare Big Bank Stocks’ 19% profit growth and expanding margins against the struggles facing Mag-7 valuations, this shift looks sustainable—at least until economic conditions change materially.