Bank stocks are on fire after a round of better-than-expected reports. Expected to grow earnings by 40%, the financial sector is outperforming the expectations on widespread strength supported by broad-based demand. Some takeaways from the reports are that revenue is growing with strength driven by increasing deposits and loans, commercial business is solid, and investors are back in action. Another critical takeaway is that NII, or net investment income, the money they make from their investments, continues to be strong, and the outlook for 2025 has improved. Not only did the banks generate above-consensus NII in 2024, but the higher-for-longer outlook taking shape for 2025 will sustain strength. 

The reports have some red flags, including broad-based increases in credit write-offs and increased credit-loss reserves, but the risk to the outlook is minimal. Charge-offs are up virtually across the board but remain healthy. The well-capitalized banks generate sufficient cash flow to sustain balance sheet health. More importantly, they can maintain balance sheet health while returning capital to shareholders, and the returns are growing. 

The Largest Banks Outperform on Diversified Business

The news isn’t without tarnish, but the nation's largest banks, including JPMorgan Chase (NYSE: JPM), Bank of America (NYSE: BAC), and Wells Fargo (NYSE: WFC), outperformed on strength driven by their diversified business. The weak spots were in consumer segments, with slight contraction in some metrics. However, the weakness was minimal and offset by strengths in other areas that more than offset it. Commercial business is strong, and momentum is building due to investments to drive growth. Other areas of strength include trading and market activity, with double-digit gains echoed in results from Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS). They report strength in all segments, including institutional, wealth management, and investing. 

The driving force for these stocks includes the bottom line results, driven primarily by NII. The higher interest rate environment, coupled with underlying economic strength, healthy labor markets, and rising wages, has their earnings up 50% to 150% and well above the levels forecasted by analysts. Looking forward, the guidance for 2025 is also good. CEO comments include noted consumer health and expectations for improving demand as the year progresses. 

The analyst's response to the news is good, aiding an updraft in these stocks. JPMorgan Chase, Wells Fargo, and Goldman Sachs received notable price target revisions affirming the group's consensus Moderate Buy rating and increasing conviction that they will trend higher in 2025. The post-release price action shows them all breaking to a new high or on track to do so. 

Small and Mid-Sized Banks Are Also Performing Well 

Banking strength is not limited to the mega-cap names. Smaller local and regional banks also outperformed in Q4 2024 and for the same reasons. The overarching theme is that business is sound and NII robust, driving outperformance in 2024 and improving guidance for 2025. Names from micro-cap Plumas Bancorp (NASDAQ: PLBC) to more prominent regional players like Unity Bancorp (NASDAQ: UNTY) and Community Trust Bancorp (NASDAQ: CTBI) are reporting better-than-expected results and providing confident guidance for 2025. Their shares are also rising, and they are on track to extend existing uptrends and set new highs this year. 

The risk is the one that drives NII. Higher-for-longer interest rates drag the economy and could slow growth or tip it into a recession. The December inflation data gave the market some hope but little reason for the Fed to cut soon. The earliest to expect a rate cut is mid-summer, and the Fed may not act until the year’s end or later. Business-friendly, pro-growth Presidential policies are expected to sustain inflation at higher-than-wanted levels.