U.S. regional bank stocks show strong rebound but raise concerns; be wary of short-term pullback risks as earnings season approaches

According to Zhitong Finance APP, as the new earnings season is about to begin, the recently rebounding U.S. regional bank stocks may disappoint investors. Some Wall Street strategists point out that it is time to bet on a pullback in this sector.

Data shows that the SPDR S&P Regional Banking ETF (KRE) has risen over 8% in the past month, nearly double the S&P 500 index's gain during the same period; the ETF has increased by 29% since its low in April. The momentum in this sector is driven by the prospects of a merger and acquisition boom, hopes for a relaxed regulatory environment, and market expectations that interest rates will "remain high for longer."

However, this round of gains has also made these U.S. regional bank stocks more susceptible to negative news ahead of the earnings season. Although Wall Street remains optimistic about the sector overall, some institutional strategists, including those from Susquehanna International Group, believe it is time to adopt a defensive stance.

Christopher Jacobson, co-head of derivatives strategy at Susquehanna, suggests that investors buy short-term put options on KRE for hedging, especially ahead of the U.S. Consumer Price Index (CPI) release next week and the start of the earnings season.

Some market participants may already be taking similar actions. On Tuesday, a trader invested over $700,000 using an options strategy known as a "put spread," betting that KRE will drop from about $63 to $59.50 by July 18. On the same day, another trader paid approximately $450,000 to purchase put options on KeyCorp (KEY.US), giving them the right to buy nearly 3 million shares of KeyCorp stock below the current price.

Christopher Jacobson noted in a report on July 9 that the actions of this KRE put spread option buyer indicate that some investors are beginning to doubt the sustainability of the rebound in regional bank stocks.

Matt Maley, chief market strategist at Miller Tabak, stated, "After such a strong rebound in such a short time, investors should be cautious and not chase prices at the current levels." He pointed out, "When companies start to report earnings, we are likely to see a market reaction of 'good news is priced in, leading to bad news.'"

Economic Barometer

Investors typically view regional lending institutions as an important barometer of the health of the U.S. economy, as mid-sized banks are more sensitive to changes in the credit environment and housing market compared to large banks. In 2023, the crisis triggered by the collapse of Silicon Valley Bank severely impacted the sector, forcing lending institutions to expand retail deposits and restructure their bond portfolios.

Currently, the sector is rebounding strongly from the slump caused by tariffs in April. Technical chart observers note that regional bank stocks are showing strong momentum, with KRE rising 6.1% after breaking above the 200-day moving average at the end of June, and it has increased by 4.6% year-to-date HSBC analysts remain optimistic about the largest regional banks, maintaining "buy" ratings on U.S. Bancorp (USB.US), PNC Financial Services Group (PNC.US), and Truist Financial (TFC.US). However, they also warn that a deterioration in asset quality or a regulatory environment that is not as accommodative as expected could negatively impact these regional banks.

Terry McEvoy, an analyst at Stephens, stated, "KRE faces some short-term risks." He pointed out that these include credit quality risks and competitive pricing pressures, which could affect net interest income. Nevertheless, Terry McEvoy remains optimistic about the long-term prospects for the sector.

Matt Maley shares a similar view. He believes that while regional bank stocks may experience a pullback in the coming weeks, "investors should wait for a better opportunity to increase their positions later this summer."