The Federal Reserve's stress test gives the green light! Goldman Sachs and other Wall Street giants rise before the market opens
All major Wall Street banks passed the Federal Reserve's annual stress test, removing obstacles for billions of dollars in stock buybacks and dividend distributions. The Federal Reserve stated that 22 large U.S. banks have the ability to withstand an economic downturn and maintain sufficient capital even after incurring significant losses. The test results increased investor interest in bank stocks, driving a broad rise in stock prices. Goldman Sachs rose 2.4%, Bank of America increased by 1%, and JPMorgan Chase, Citigroup, and Wells Fargo saw gains between 0.5% and 2%. Analysts believe the stress test results are positive and support an improved capital return environment
The Zhitong Finance APP noted that in pre-market trading on Monday, shares of major Wall Street banks rose across the board. Previously, these banks had all passed the Federal Reserve's annual stress tests, clearing the way for the initiation of billions of dollars in stock buybacks and dividend distributions.
The Federal Reserve stated last Friday that 22 large U.S. banks have sufficient strength to withstand future economic downturns and maintain lending capacity. The stress tests showed that even after absorbing hundreds of billions in losses, these financial institutions still maintained adequate capital levels.
This result strongly confirms that the U.S. banking industry remains robust amid increasing economic uncertainty, helping government officials and investors assess the banks' continued lending capacity during a crisis. Passing the stress tests also means that banks can advance shareholder return plans, including dividends and buybacks. "All participating banks passed the tests (which is not surprising), supporting our view that they still have sufficient capital return capacity," said an analyst from Royal Bank of Canada Capital Markets.
Bank of America (BAC.US) rose 1% in pre-market trading, while JPMorgan Chase (JPM.US), Citigroup (C.US), and Wells Fargo (WFC.US) saw increases ranging from 0.5% to 2%. Goldman Sachs (GS.US) was up 2.4%, and Morgan Stanley (MS.US) also saw a slight increase.
"We believe the overall results of the stress tests are positive and should enhance investor interest in the sector," noted an analyst from Wall Street investment firm Raymond James, adding that a potential decrease in capital buffers should also be viewed as positive progress.
Compared to 2024, banks performed better in the 2025 stress tests, partly due to the relatively lenient scenario settings this year. The tests simulated economic conditions during a crisis, and since the actual economy had already shown signs of weakness before the tests, the final scenario settings were less stringent.
"The overall results are broadly positive, providing support for all participants to improve the capital return environment," wrote analysts at Jefferies in a report, stating that the final value of the capital buffer will need to be confirmed in August, and banks may still have room to adjust dividend increases.
The 2025 test scenarios include a severe global recession with commercial real estate prices plummeting by 30% and housing prices dropping by 33%, along with an unemployment rate soaring by 5.9 percentage points to 10%.
The Federal Reserve has implemented the Dodd-Frank stress tests since 2011 to assess the ability of large banks to cope with sharp economic downturns and to prevent a repeat of the 2008 financial crisis. The banking industry has long questioned the tests as overly complex, costly to implement, and restrictive on capital returns even when financial institutions are healthy.
The S&P 500 Bank Index, which tracks large banks, has risen about 12% year-to-date, outperforming the benchmark S&P 500 Index's 5% increase
