Jasmine Birtles
Your money-making expert. Financial journalist, TV and radio personality.
3 US Banking Stocks I Would Buy Before Rate Cuts
Ruby Layram
4th Oct 2024
This week, Jerome Powell, Chair of the US Federal Reserve, made a highly-anticipated speech in which he suggested that US interest rates could be cut in the near future. Rate cuts are a pretty big deal in the world of finance and the speech got everyone talking about how further cuts could impact the economy.
After hearing the speech, I was particularly interested in areas of the market that might benefit from US interest rate cuts. I did a bit of digging and found several stocks that I’ve added to my watchlist!
In this post, I will share 3 US banking stocks that I’m watching before the rate cuts, why this area of the market might do well and how to know if a stock might be worth keeping an eye on.
Let’s jump straight into why you clicked on this article, here are 3 US banking stocks that I’m watching right now.
1. Wells Fargo
Wells Fargo is one of the largest banks in the U.S. and has been a staple in the financial industry for years.
While the company has faced some challenges, it’s shown resilience. What makes Wells Fargo particularly attractive right now is the bank’s massive consumer lending division. When interest rates are cut, more people will consider refinancing their homes, taking out loans and using credit cards. All of which fall under the lending division.
The main drawback of this banking company is that Wells Fargo does not offer investments in Gold – which usually experiences increased demand during rate cuts. While the lending division might see an influx of borrowers, the bank may struggle as savers move their cash into alternative investments that offer a higher yield.
2. JPMorgan Chase
JPMorgan Chase is one the most well-known US banks over here in the UK. You might know them for their Nutmeg ISA accounts or Chase debit cards.
This US bank is a leader in both retail and investment banking, which gives it a robust foundation to stand its ground during market fluctuations. JPMorgan has a diverse revenue stream, which is crucial when rate cuts impact various segments of the economy differently.
While savings accounts may become less popular, the investment bank’s ISA products could attract investors who are looking for ways to make the most of their cash (and get some tax free gains!)
3. Citigroup
Citigroup is a US bank with a large international presence and quite an expansive ATM network across the US. Although one of its most popular products is savings accounts, the presence of ATMs and international ties mean that the bank should be able to withstand fluctuations that occur due to rate cuts.
At the time of writing, the bank offers a very competitive savings account. Although rate cuts are on the horizon, Citigroup may continue to prioritise high yields. This would attract savers who are looking to switch from less-competitive accounts.
Why Do Banking Stocks Do Well After Rate Cuts?
So, why have I got my eye on US banking stocks when rates are about to get slashed?
It’s important to note here that there is no guarantee that banking stocks are a good bet. In fact, the performance of US banking stocks after rate cuts could swing in either direction.
The main reason that I’m optimistic is loans.
Loans Become More Attractive
When interest rates fall, loans become more affordable for both businesses and consumers. People are more likely to take out mortgages, refinance existing loans, or use credit cards when the cost of borrowing drops.
This influx of people taking out loans could boost a bank’s revenue and have a positive impact on profitability. Wells Fargo, JPMorgan, and Citigroup all offer various lending services that put them in a position to prosper.
How to Know Which Banking Stocks Will Do Well After Rate Cuts?
Not every bank is guaranteed to succeed when rates drop, so how can you tell which ones are worth investing in?
Past Performance
A good indicator of how a bank will perform after a rate cut is its past performance during similar economic conditions.
For example, banks that stood their ground – or even seen growth- after previous rate cuts are more likely to benefit again. One of the best ways to research stocks to see how they’ve performed is to take a look a the price chart, focussing on periods that align with past rate cuts.
Company Health
It’s crucial to look at a bank’s overall health. This includes factors like their liquidity, their loan-to-deposit ratio, and the diversity of their revenue streams.
JPMorgan, for instance, has a well-diversified portfolio that isn’t overly reliant on one product offering, which makes it better positioned to withstand economic shifts.
Look at the Ratios
Keep an eye on key financial ratios like the price-to-earnings ratio and the return on equity.
These metrics can tell you a lot about how well a bank is using its money and generating profits. A bank with strong financial ratios is often better equipped to handle fluctuations and take advantage of rate cuts.
What Other Areas of the Stock Market Might Benefit from Rate Cuts?
While I’ve decided to look at banking stocks, this is not the only area of the market that could benefit from rate cuts.
Tech stocks are a good example of investments that often perform well after rate cuts. Lower interest rates make it cheaper for companies to borrow money for development which means that they can push for growth.
REITs also tend to benefit as lower rates make it easier to afford a mortgage, which can lead to an increase in first-time buyers.
One of the best ways to maximize your chance of seeing returns after rate cuts is to diversify your portfolio across several markets. This will increase your chances of investing in a prosperous corner of the market and protect you from losing all of your funds if one area heads south.
With the Federal Reserve’s interest rate cuts likely on the horizon, banking stocks are a smart place to start looking for opportunities. Wells Fargo, JPMorgan Chase, and Citigroup are three solid options that could thrive in a low-rate environment.
But remember, there is no guarantee that these stocks will see returns. One of the smartest ways to invest during rate cuts is to diversify across various areas that could potentially benefit.
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