BofA mid-year review: U.S. bank stocks remain constructive, but further upside requires macro clarity and delivery of earnings resilience

Overview

This is a mid-year review report by Bank of America on the U.S. banking sector. Using the ten core questions raised at the beginning of the year as its framework, it reassesses bank stocks versus the S&P 500, regional banks versus GSIBs, regulatory change, M&A, interest rates, AI, credit quality, digital assets, domestic capex, and capital markets activity. The report argues that U.S. bank sector fundamentals have not materially deteriorated despite negative news year to date. Loan growth, resilient net interest income, capital markets revenue, and regulatory capital release remain supportive, but macro uncertainty, higher-for-longer rates, deposit competition, and credit headline risk shift the conclusion from one-sided optimism to a more conditional view dependent on catalysts being realized.

Core views

The core view is that bank stocks can still outperform the broader market, but it is no longer as certain as it was at the start of the year. The three pillars of regulatory shift, normalized rates, and earnings rebound remain in place, but are being tested by stagflation, geopolitical conflict, and yield-curve changes. The report maintains positive views on regulatory easing, accelerating bank M&A, a rebound in domestic capex, and capital markets meeting high expectations. It believes the absence of Fed rate cuts alone will not derail bank stocks. It rates regional banks outperforming GSIBs and bank stocks becoming an AI trade as “possible,” while remaining cautious on further improvement in credit quality and the full mainstreaming of digital assets.

Analysis framework

The report uses a mid-year “ten questions, ten answers” review method, comparing the judgments in its January outlook one by one against year-to-date market performance, regulatory filings, earnings revisions, loan growth, capital markets revenue, rate sensitivity, AI investment cases, and credit indicators. The focus is not to provide a single-stock target price, but to assess the relative opportunities, catalysts, and risk exposures of different bank sub-sectors from 2H26 through 2027.

Methodology notes

• thematic Q&A reviewtop ten questions mid-year review framework

  Using the ten investor questions from the beginning of the year as the baseline, it checks one by one whether the answers are maintained, upgraded, or downgraded.

  This framework is suitable for sector thematic research because it breaks market performance, policy changes, earnings resilience, and investor concerns into trackable questions rather than relying solely on a single valuation conclusion.

• valuation and earnings comparisonrelative valuation and EPS growth framework

  Assessing re-rating potential using bank stocks’ performance relative to the S&P 500, 2027E P/E, and expected EPS growth.

  The report emphasizes the combination of roughly 9–10x 2027E P/E and about 12%–13% EPS growth for large banks, arguing that if macro clarity improves, the valuation discount could be reconsidered by the market.

• macro policy transmissionregulation, rates, and rebound three-factor framework

  Explaining structural tailwinds for the banking sector through regulatory change, normalized rates, and an earnings rebound.

  The report argues that these three factors remain the foundation of its constructive view on bank stocks, but also clearly notes that stagflation risk, higher-for-longer rates, and rising deposit costs could weaken the speed of delivery.

• sub-sector rotationWall Street versus Main Street relative performance framework

  Comparing the relative performance and catalysts of capital-markets-related banks, GSIBs, trust banks, regional banks, and SMID banks.

  The report notes that year to date GS, MS, trust banks, and some SMID banks have performed well, but if domestic capex and macro confidence improve in 2H26, regional banks could regain valuation recovery.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• U.S. large banks

  The report’s core covered asset class; they have lagged the S&P 500 in the short term due to negative headlines, but valuation and 2027 EPS growth provide potential recovery room.

  Strengths

  Earnings revisions remain relatively positive, loan growth and NII resilience are solid, capital markets revenue is strong, and regulatory capital pressure is likely to decline.

  Weaknesses

  More sensitive to concerns around credit-card policy, NDFI credit headlines, AI disruption in wealth management, and stablecoin deposit substitution.

  Comparison

  They have clearly lagged the S&P 500 year to date; relative to regional banks, they have stronger scale and capital markets exposure, but headline risk is also more concentrated.

  Risks

  Stagflation, higher-for-longer rates, rising deposit costs, the spread of credit incidents, and repeated swings in regulatory expectations.

• Regional banks and SMID banks

  Potential re-rating targets in 2H26, benefiting from improved capital rules, domestic capex, and recovering Main Street confidence.

  Strengths

  The Standardized Approach brings capital flexibility, and regional-bank M&A can add scale, low-cost deposits, and efficiency.

  Weaknesses

  More dependent on macro clarity and on the credit environment for commercial real estate and SMEs; valuation recovery requires sustained loan demand.

  Comparison

  Their performance has been steadier than large banks year to date, but over the prior 1, 3, and 5 years they have generally underperformed GSIBs.

  Risks

  CRE revaluation, idiosyncratic C&I risk, deposit competition, M&A integration risk, and short-term pressure on acquirer share prices.

• Capital-markets-related banks (GS, MS, and Trust Banks)

  The thematic assets that have led performance year to date, benefiting from recovery in investment banking, trading, M&A, IPOs, and debt issuance.

  Strengths

  Strong momentum in capital markets revenue, solid trading resilience, improved regulatory flexibility, and a positive earnings revision cycle.

  Weaknesses

  Highly sensitive to market volumes, risk appetite, rate volatility, and the capital markets window.

  Comparison

  They have outperformed money centers and super-regionals, resembling the beneficiary pattern from the late-1990s period of accelerating capital markets momentum.

  Risks

  A pullback in trading activity, long-end rate volatility, weaker market risk appetite, and valuations that may already discount too much optimism.

• JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C)

  The report believes both are relatively attractive money-center banks on a risk-reward basis for capital-markets-themed positioning.

  Strengths

  Diversified businesses with strong capital markets exposure, allowing participation in recovery in investment banking and trading.

  Weaknesses

  Also exposed to consumer slowdown, AI-driven deposit disruption, and policy headline risk affecting large banks.

  Comparison

  More diversified than GS and MS, with less pure capital-markets beta but a broader business mix.

  Risks

  Weakening consumer credit, rising deposit costs, deviations in final capital-rule implementation, and competition from non-bank financials.

• BNY (BK)

  The trust bank representative recommended by the report, viewed as a potential beneficiary of AI and digital asset adoption.

  Strengths

  Meaningful self-help improvement potential, while its trust and infrastructure characteristics help it participate in AI-, data-, and digital-asset-related service demand.

  Weaknesses

  It still needs to prove in the short term that AI and digital asset adoption can translate into sustainable earnings improvement.

  Comparison

  Among trust banks, the report sees it as well positioned, with beneficiary themes different from traditional loan-driven regional banks.

  Risks

  Technology investment returns falling short of expectations, delays in digital asset regulation, and volatility in capital markets activity.

• Banking sector AI and digital asset exposure

  A long-term productivity and infrastructure theme rather than evidence for a near-term structural sector ROE re-rating.

  Strengths

  AI can improve back office, front-end customer service, risk and compliance, data infrastructure, and employee productivity; tokenization is attractive in B2B and capital markets scenarios.

  Weaknesses

  Early savings are often reinvested, making it hard to materially lift margins in the short term, while digital assets remain insufficiently mainstream in P2P scenarios.

  Comparison

  Relative to tech stocks, banks look more like beneficiaries of AI applications and infrastructure than the high-beta AI trade the market tends to favor.

  Risks

  AI benefits being competed away, deposits and wealth management being disrupted by new entrants, and the CLARITY Act changing expectations for funding models.

Key data

• Large-bank relative performanceAbout 670bp behind the S&P 500 year to dateThe report attributes the underperformance to credit-card rate caps, NDFI credit headlines, AI disruption, and concerns about deposit model implications from stablecoins/the CLARITY Act.
• SMID bank relative performanceAbout 90bp behind the S&P 500 year to dateThe decline is smaller than for large banks, and performance divergence is increasingly driven by stock-specific factors rather than size alone.
• Large-bank valuation and earningsAbout 9–10x 2027E P/E, corresponding to about 12%–13% EPS growthThe report believes the combination of valuation and earnings growth could attract capital reallocation into bank stocks if macro clarity improves.
• Loan growth1Q26 large-bank loans +9% YoY, mid-size banks +3% YoYLoan growth was strong at the start of the year, but macro uncertainty related to the Iran war has recently weighed on loan momentum.
• Capital markets revenue1Q26 investment banking revenue +30% YoY, trading revenue +17% YoYCapital markets momentum is the main support for GS, MS, trust banks, and some large banks.
• Regional bank capital releaseThe Standardized Approach could bring about a 100bp ROTCE upliftAdjustments to capital rules are seen as a source of flexibility for regional-bank growth, buybacks, and shareholder returns.
• Basel 3 impactDisclosures from super-regional banks show an average benefit of about 9% to RWAThe report treats this as one piece of evidence that the regulatory shift benefits regional banks’ capital flexibility.
• Stress test capital requirementsThe Fed estimates annual stress test adjustments could bring an additional roughly 240bp improvement in CET1 requirements for Category I/II banksThis is another potentially positive impact of regulatory change on large-bank capital requirements.
• Rate sensitivityUnder a +100bp rate scenario, large banks are expected to see NII rise about 90bp, mid-size banks about 200bpThe report believes banks can absorb moderate yield-curve changes, but deposit costs and competition need monitoring.
• Mortgage market trigger conditionA 10-year U.S. Treasury yield of around 4% or lower could be more favorable for a recovery in housing and mortgage activityMortgage- and housing-related fee income remains constrained by long-end rates.
• AI investment payoff casesJPM’s roughly $2bn AI investment generated about $2bn of benefits; TD targets CAD $1bn in annual AI valueAI case studies show long-term efficiency potential, but the report believes they are still insufficient in the short term to drive a structural sector ROE re-rating.

Impact & implications

From an investment perspective, the report supports continued focus on structural improvement in the U.S. banking sector, but with differentiation across sub-sectors. Capital-markets-related banks benefit from resilience in M&A, IPOs, bond issuance, and trading revenue; the re-rating of regional banks depends more on macro clarity, capital release, and the diffusion of domestic capex; large-bank valuations are below their earnings growth potential, but they are more vulnerable to headlines around credit cards, NDFI, AI-related deposit disruption, and digital asset regulation. Overall, the opportunity in bank stocks comes from re-pricing earnings resilience and policy tailwinds, while the risks come from higher-for-longer rates, the spread of credit incidents, and long-term disruption to deposits and wealth-management models from AI/stablecoins.

Risks

• Stagflation risk and geopolitical conflict could weaken loan demand, capital markets activity, and investor risk appetite.
• Higher-for-longer rates and yield-curve changes could create negative sentiment and potentially weigh on housing, CRE, and SME activity.
• Rising deposit costs and deposit competition could offset the NIM tailwind from fixed-rate asset repricing.
• Credit headline risk from rapid NDFI loan growth could continue to affect valuations of large and regional banks.
• CRE revaluation, idiosyncratic C&I defaults, and private-credit-related events could call into question the base case of stable credit quality.
• AI disruption to wealth management, deposits, and software models could be priced by the market before productivity gains are.
• Advancing regulation around digital assets and stablecoins could intensify concerns about banks’ long-term funding models.
• Although bank M&A has strategic logic, acquirer share prices may underperform in the short term, and integration and premium paid could also affect returns.

What to watch

• Whether macro clarity improves in 2H26, and whether the post-Labor Day or around-midterm-election bank stock buying interest described in the report emerges.
• Follow-up regulatory issues, including the final implementation of tailoring, liquidity rules, Basel 3, GSIB, ERBA, and stress test adjustments.
• Whether capital release at regional banks translates into loan growth, buybacks, dividends, or M&A capacity.
• The number of bank M&A deals, execution speed, acquirer share-price reaction, and whether transactions truly deliver scale and low-cost deposits.
• The Fed rate path, the 2s/10s U.S. Treasury spread, whether the 10-year Treasury yield approaches 4%, and whether housing/mortgage activity recovers.
• Trends in NII, deposit beta, deposit outflows, fixed-rate asset repricing, and net interest margin.
• Whether NCOs, NPLs, loan loss reserves, NDFI exposure, and CRE refinancing pressure remain manageable.
• Whether disclosed AI investments, savings targets, and scaled benefits from banks such as JPM, CFG, RY, and TD continue to increase.
• The pace of adoption of the CLARITY Act and tokenization in institutional B2B, capital markets, and payments scenarios.
• Whether M&A, IPOs, debt issuance, and trading revenue sustain the strong capital markets momentum seen in 1Q26.