HSBC Downgrades JPMorgan, Goldman Sachs, and Bank of America After Record Gains

After a furious rally that pushed major U.S. bank stocks near all-time highs, HSBC has issued a rare warning. The bank downgraded JPMorgan Chase, Goldman Sachs, and Bank of America, citing concerns that the recent surge has outpaced underlying fundamentals.

This move comes as the KBW Bank Index, a benchmark for leading lenders, ended its longest-ever winning streak. The index remains just below its January 2022 peak, highlighting the sector’s remarkable rebound from earlier market turmoil.

The downgrades have already rattled investors, with shares of all three banks falling more than 1% after the announcement. The sector’s momentum now faces a critical test as earnings season approaches.

Macroeconomic Uncertainty Drives HSBC’s Caution

HSBC analyst Saul Martinez pointed to several unresolved risks, including elevated macro uncertainty, the prospect of slowing economic growth, and the likelihood of additional interest rate cuts through 2025 and 2026. These factors, he argued, are not yet reflected in current stock prices.

While recent optimism has been fueled by strong credit quality, improved investment banking activity, and a favorable regulatory environment, Martinez believes these positives are already priced in. The risk, he suggests, is that any negative surprises could trigger a sharp correction.

Other analysts echo this caution, with some downgrading bank stocks due to valuation concerns and the sector’s vulnerability to shifting economic conditions.

Did you know?
The KBW Bank Index’s recent 11-day winning streak was its longest ever, reflecting a dramatic reversal from the selloff triggered by trade tensions and economic uncertainty earlier this year.

Valuation Concerns and Limited Upside for Big Banks

HSBC’s downgrade reflects a broader worry that the largest U.S. banks may have limited room for further gains. Both JPMorgan and Goldman Sachs were cut from “hold” to “reduce,” while Bank of America was moved from “buy” to “hold.”

Despite impressive rallies, JPMorgan and Goldman Sachs have surged 35% to 50% since April, with Bank of America up nearly 40%. Martinez argues that these stocks are now fully valued. The absence of a significant boost in investment banking activity or continued strong market performance could leave investors disappointed.

The timing is notable, as the downgrades arrive just ahead of a pivotal earnings season that could reshape outlooks for the sector.

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Super-Regional Banks Emerge as Relative Winners

While HSBC turned cautious on the Wall Street giants, the bank took a more positive stance on super-regional lenders such as U.S. Bancorp, PNC Financial Services, and Truist Financial. These institutions, rated “buy” by HSBC, are seen as more attractively valued even after their own rallies.

Martinez’s analysis suggests that super-regionals may offer better risk-reward profiles in the current environment. Their relative insulation from some of the macro risks facing the largest banks makes them appealing to investors seeking stability.

This divergence in outlook underscores the growing complexity of the banking sector as it navigates a shifting economic landscape.

Market Volatility and Regulatory Backdrop Add to Uncertainty

The HSBC downgrades come amid heightened market volatility and a more challenging regulatory environment for financial institutions. Recent credit rating downgrades from other agencies have added to the sector’s headwinds, raising concerns about future borrowing costs and regulatory pressures.

Investors are now watching closely for signals from upcoming earnings reports and guidance. The sector’s ability to weather macroeconomic uncertainty and maintain profitability will be key to sustaining recent gains.

As Wall Street digests HSBC’s warning, the debate over bank stock valuations and future prospects is likely to intensify.