Wall Street Bets Big on Banks -- Is This the Start of a Financial Stocks Supercycle?

U.S. bank stocks are quietly building momentum and hedge funds are loading up. According to Goldman Sachs' prime brokerage unit, net buying by fast-money funds just hit a near 10-year high. What's fueling the charge? A trifecta of tailwinds: rising hopes for Fed rate cuts, a clean sweep in the latest bank stress tests, and expectations for lighter-touch regulation. Together, they've pushed the S&P 500's (SPY) financials gauge to a record high. Piper Sandler also flagged a surge in bullish positioning, with call option activity on the Financial Select Sector SPDR Fund (XLF) approaching a four-month peak.

Analysts are beginning to lean in. At UBS, their large-cap bank basket has become a favored way to ride this market rally. Over at Bank of America, Ebrahim Poonawala and his team believe the stress test results could be just the spark the sector needs. And RBC's Gerard Cassidy sees more upside ahead. He pointed to possible 2025 regulatory changes that could loosen capital requirements making lending more profitable and encouraging banks to go on offense with their loan books. For now, Cassidy is overweight U.S. financials globally and expects repricing opportunities as pandemic-era fixed loans start rolling off.

Investors are watching the next catalyst: earnings. JPMorgan (NYSE: JPM), Citigroup (NYSE:C), and Wells Fargo (NYSE: WFC) are all set to report on July 15. While sector-wide earnings may stall this quarter after nine straight beats, sentiment hasn't soured. Cassidy also noted that many banks are starting to benefit from a key dynamic higher yields on assets while funding costs trend lower. The KBW Bank Index has rebounded more than 30% from its April low, though it still trades about 5% below 2022 highs. For value-focused investors, U.S. lenders could be staging a quiet comeback one that's supported by macro shifts, regulatory tailwinds, and improving profitability levers.