Risk-on momentum in bank stocks echoes aftermath of dot-com bust

The recent weakness in artificial intelligence high-flyers has investors rotating into the less glamorous corner of the market: financial stocks.

The group has been the S&P 500 Index’s second-biggest gainer in the past three months, trailing only healthcare stocks. That’s put the KBW Bank Index of the largest lenders on track to beat the broader equities gauge for a third consecutive year.

That would mark the index’s longest streak of outperformance since 2003.

As worries are swirling around lofty valuations of tech megacaps, investors are moving money into firms that provide all the funding for the AI buildout.

And to some on Wall Street, rock-solid earnings in the sector coupled with signs the economy is humming along mean the momentum in banks has more room to run.

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“You’re starting to see evidence that banks are among the greatest beneficiaries of the tech and AI revolution,” said Wells Fargo & Co analyst Mike Mayo. “Banks benefit from AI capex and the echo effect on the top line and the efficiency benefits on the bottom line.”

The KBW Bank Index has advanced in each of the past four sessions, widening its rally this year to 18%. That compares with a 13% gain in the S&P 500 during that time.

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The latest CPI report, which showed consumer prices rose 3.4% in July from a year earlier, could present another tailwind for the sector. Since 1990, when inflation was between 3% and 3.5%, financials have tended to outperform the broader market by the most among other sectors, data compiled by Bespoke Investment Group show.

A steepening of the Treasury curve, in which long-term yields rise faster than short-term rates, is one reason why Fundstrat Global Advisors’ Mark Newton is overweight the broader financials group.

The dynamic widens the gap between what banks earn on long-term loans versus what they pay on shorter deposits.

Newton sees the group outperforming further and says any recent weakness across financial subsectors is a buying opportunity – “especially because the selloff in the bond market is likely to continue in the weeks ahead”, he said.

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For most of 2026, banks have largely been a sideshow to the AI trade the market has been fixated on. More recently though, they began to benefit as an “AI-adjacent” sector that’s still less volatile than semiconductor stocks, known for their boom-and-bust cycles.

Should the unwinding of the AI trade lead to a mild economic downturn, bank stocks could continue to outperform the broader market, according to John Higgins, chief economic advisor at Capital Economics.

“If the stock market bubble in AI has already burst, then banks are likely to keep outperforming the S&P 500 judging by the dot-com boom and bust,” he said in a July note.

Catalysts abound

Another reason for optimism lies in second-quarter scorecards, which showed the largest US lenders hauled in the most revenue from advising on equity offerings since 2021.

That was largely driven by the record-setting IPO from SpaceX, which allowed Goldman Sachs Group Inc. and Morgan Stanley to collect roughly $100 million of fees each. Shares of the two companies have jumped at least 18% this year, the best performance among the biggest US lenders.

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And even after this year’s rally, the price-to-earnings ratio of the KBW Index is sitting near 12.8, below the long-term average of over 13.

The valuation multiple is “still on the lower end of where we think it ultimately winds up”, said Mayo. “Investors have consistently underestimated the earnings power of banks during such a transformational environment.”

However, not all valuation metrics look this compelling. The KBW Bank Index is trading at 2.4 times its tangible book value, the highest level since early 2008. The P/TBV ratio is an important metric as it directly relates to bank returns.

Read: AI ‘contagion channels’ show huge economic risk if bubble bursts

And UBS Group AG analyst Erika Najarian warned of some volatility ahead. Much of the second-quarter strength was driven by capital markets, she said, and “any indication that the capital markets environment is deteriorating could weigh on the group.”

Even with mixed valuation metrics, investor appetite in the the sector is still on full display. Investors added $3.4 billion into the State Street Financial Select Sector exchange-traded fund in July, the most since 2024. The fund is also on track for the largest quarterly inflow since then.

“Healthy top-line growth, increased loan demand and resilient credit quality underpin bank fundamentals,” said Bloomberg Intelligence analyst Herman Chan. “Banks could provide an important source of support for the broader market if parts of the AI trade lose momentum.”

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