Christopher McGratty, the head of US bank research at KBW, a Stifel company, joins Josh Schafer and Madison Mills on Market Domination to discuss how to play regional banks during the Federal Reserve’s easing cycle.

“The banking industry typically does better when rates are going up than down, but given the speed at which we tightened over the last couple of years, the opposite is true. We think banks will actually do better. Earnings will expand at a better pace as rates go down over the next one to two years.”

McGratty tells Yahoo Finance he expects 25 basis point cuts from the Fed going forward, with rates coming down to 3% by the middle of 2025.

He says investing in regional banks is “a bit of an unwind or a catch-up trade. As the yield curve has inverted, we have a positively sloped curve for the first time in a couple of years; traditional spread-based lenders should do better. So banks that make their money [by] loaning money out and making a spread, they should do better as rates come down.”

McGratty says “Companies like Comerica, historically one of the banks that you'd want to own on the upcycle, is actually one of the best plays on the down cycle… Overall, the small regional banks should do better than your traditional universal money center. Banks that did better on the way up. So it's a bit of a torch passing between the groups.”

He acknowledges some investors may still have scars from the regional bank crisis of 2023 but says the sector has largely recovered with earnings on the horizon. “The industry has proven resilient. The deposit situation at the industry level has proven resilient. We're back to growth, and less of the conversations are about sustainability and [whether] the banks will survive. But it's also what is the normalized earnings power of this sector.” McGratty expects positive earnings growth in 2025 and 2026, which could attract investors looking for a longer-term play.

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This post was written by Naomi Buchanan.