The performance of US bank stocks in the quarter is the worst in three years. Can they turn things around with next week's financial reports?

The Middle East is a region of turmoil and armed conflict, and as private credit risks disturb the market, the stock prices of large Wall Street banks have experienced their worst start to the year since the regional banking crisis. However, the current bank stock valuations are relatively low, and if next week's financial reports show strong performance, it may trigger a rebound in stock prices. Data shows that the KBW Bank Index fell by 6% in the first quarter, marking the worst quarter performance since the regional banking turbulence in 2023. The index surged by 29% in 2025, outperforming the S&P 500 and Nasdaq 100 indices, but has had a weak start this year. Despite a rebound of 7.9% since early April, the bank index still has a price-earnings ratio of only 12 times, a 40% discount compared to the 20 times price-earnings ratio of the S&P 500 index. Michael Orok, chief market strategist at Jones Trading Company, pointed out, "From a valuation perspective, bank stocks are still one of the most attractive sectors in the S&P 500. After a strong performance in 2025, this sector is currently in a consolidation phase in 2026." The earnings season will kick off on Monday, with Goldman Sachs Group, Inc. leading the way with its earnings report, followed by JPMorgan Chase, Citigroup, Wells Fargo & Company, Bank of America Corp, and Morgan Stanley. After the relaxation of regulatory policies and several weeks of market volatility boosting trading activities, these six largest Wall Street banks are expected to announce solid first-quarter earnings. Looking more broadly, analysts expect a 16% increase in earnings for financial companies in the S&P 500 index in the first quarter, compared to 12.5% for other components of the index. However, more crucial than the numbers are the executives' outlook on private credit, interest rates, trading activities, and how the Iran war may affect economic growth and inflation - especially discussions about oil prices exceeding $100 will be closely watched. Mike Mayo, head of U.S. large-cap bank research at Wells Fargo & Company, stated, "The trend of conflicts is highly correlated with the performance of bank stocks. If conflicts escalate in the short term, the outcome is unpredictable - unless there is a unique perspective, it's hard to be fully confident." The management comments from the banks will reveal the health of the U.S. consumer and the strength of the world's largest economy, and the banks' corporate lending and M&A activities also reflect the operational status of other companies. Bloomberg Intelligence analyst Herman Chen emphasized, "The key is whether the full-year guidance and macroeconomic pressures will reveal credit quality risks. Reaffirmation of guidance by banks will be seen as positive signals." Emerging credit risks The crisis in the $1.8 trillion private credit industry is casting a shadow over the stock prices of banks, asset management companies, and commercial development companies, affecting their performance in this earnings season. Jefferies Financial Group Inc. already reported a $17 million loss in the first quarter due to its involvement in the Market Financial Solutions and First Brands Group credit crisis. Ebrahim Punawalla, securities analyst at Bank of America Corp., said, "The private credit issue itself will not disrupt the profit trajectory and prospects of banks, but when banks release earnings next week, you do want to get more background details from them." Although the first-quarter sell-off led to a shrinkage in the market value of large banks, the fundamentals have not been significantly impacted. UBS Group AG analyst Erica Najarrian pointed out, "Some quality stocks are now on sale." In a report on April 7, she wrote, "The performance from the beginning of the year may present opportunities, especially considering the strong momentum in direct lending, capital markets, and industry relaxation of regulatory constraints." She then upgraded Morgan Stanley to a "buy" rating. Other Wall Street professionals share the same view. Mayo from Wells Fargo & Company is a long-time bullish analyst on bank stocks, and he said that although earnings guidance may be cautious and discussions may focus on conflicts, "long-term investors can see it as a buying opportunity." Mayo added, "The $8 trillion investment-grade bond market indicates that banks are as safe or even safer than ordinary companies, yet the stock market gives a 40% discount - one of the judgments is correct." This year, regional bank stocks have proven to be more resilient than large banks, as this sector had underperformed in 2025. Bloomberg Intelligence analysts noted that this resilience "reflects lower risk perception of regional banks in areas such as lending to non-banks and lack of excessive concern from large banks about rising costs." If macro risks subside, Morgan Stanley analyst Manan Ghosal believes that most lending institutions will outperform the market, "given significant capital releases, strong earnings momentum, and low credit risks." In a report to clients on March 31, he wrote, "For most banks, full-year performance guidance is still achievable. Therefore, with banks reiterating their prospects, lower valuations present an attractive risk-return ratio during the earnings season window." However, given the fluid situation of the Iran war and the uncertainty of the two-week ceasefire agreement, investors most need to understand the trends of inflation and the economy to assess where bank stocks and the overall market are headed. Punawalla of Bank of America Corp. stated, "The market may need to consolidate after any rebound until investors have a clearer picture of the direction of inflation. Assessing this may take several weeks or months."