After a difficult session yesterday, market momentum has shifted for some regional bank stocks. Both PacWest Bancorp (NASDAQ:PACW) and Western Alliance (NYSE:WAL) are rising steadily, a stark contrast to their performances yesterday. For all the negative energy yesterday, investors seem to be looking ahead in anticipation of the Federal Reserve cutting interest rates within the coming months.
With the recent collapse of First Republic (OTCMKTS:FRCB), this type of turnaround is crucial for the future of the regional banking sector. However, it doesn’t mean that the banking crisis is over — or that the current momentum will necessarily continue.
What does this mean for the long- and short-term future of these regional bank stocks? Let’s take a closer look at today’s patterns and what investors can expect.
What’s Happening With Bank Stocks?
Despite some volatility, both aforementioned regional bank stocks are performing well today. PACW is up more than 75%. Meanwhile, WAL stock is up more than 35%.
Investors might not have expected this movement, as both names recently faced trading halts amid turmoil spurred by the collapse of First Republic. Yesterday, WAL plunged as speculation increased around the Federal Deposit Insurance Corporation (FDIC) closing in. It’s not often that a company marked as a likely candidate for “FDIC death” sees such a dramatic turnaround.
All this begs the question: Why is market momentum doing a 180-degree turn? After all, rising interest rates don’t tend to be good for bank stocks. As InvestorPlace contributor Joel Baglole noted, names like PACW stock will “remain under a cloud” until the Federal Reserve ceases its rate hikes.
Well, a group of JPMorgan analysts have forecast that interest rate cuts are on the horizon and could be implemented as early as September 2023. The analysts attribute this projection to the fact that they haven’t seen such a fast rate cycle since the 1980s. Wells Fargo analysts also predict that rate cuts are coming, although they don’t foresee cuts until 2024.
In addition, JPMorgan has also upgraded WAL stock recently. Analyst Steven Alexopoulos issued an “overweight” rating for the company. While he maintains a price target of $45, that still represents significant upside from the current price. The analyst stated in a note:
“We see a changing landscape, including the potential for regulatory changes (such as with FDIC insurance levels) or stock trading (such as a ban on short selling) or for the Fed to pivot (in line with market expectations). In the meantime, we see the favorable updates coming from select banks (such as WAL) that deposit balances have remained stable (or increased) helping to counterbalance very negative sentiment.”
What Comes Next?
To say that this a complicated time for regional banks would be an understatement. It’s dangerous to assume that the banking crisis is over — or even close to it. Even so, the prospect of reduced interest rates in the near future could absolutely boost these struggling bank stocks, if they can survive until September.
Given how far PACW stock and WAL stock have fallen, though, it’s hard to be optimistic. The momentum that they’ve experienced today could easily die down soon. And when it does, the companies will likely be back to struggling to stay afloat.
On the date of publication, Samuel O’Brient did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.