Bank stocks outpaced the S&P 500 in 2025. Will that trend continue into 2026? 

Despite the strong performance of financial stocks in 2025, investors should be more selective heading into 2026. Federal Reserve rate expectations and regulatory tailwinds appear largely priced into large-bank valuations, with many trading at or above historical price-to-book levels. That suggests further outperformance will depend less on multiple expansion and more on continued earnings growth, particularly from fee-based businesses such as investment banking and wealth management. From an allocation standpoint, we view financials as a value and income complement to a diversified equity portfolio, rather than a pure growth driver. 

What is the bull case for owning financials or what would make you bearish? 

The bull case for financials centers on the normalization of economic policy, including interest rates, which could reaccelerate economic activity and drive both credit demand and fee income. Institutions with large capital markets and investment banking platforms stand to benefit from increased M&A activity, underwriting, and advisory revenues. Strong balance sheets also leave many banks better equipped to weather a modest economic slowdown. However, rising credit losses or macroeconomic shocks could quickly pressure profitability. Combined with historically elevated equity valuations, continued stress in the commercial real estate market, and declining consumer savings rates, these risks could weigh on bank stocks. 

Regionals, small-caps, big multinationals, wealth management, insurance and why? 

Wealth management firms could lead financial sector performance in 2026. Companies with large wealth management platforms are better positioned than traditional lenders to navigate market volatility due to recurring asset-based fees, durable client relationships, and less balance-sheet sensitivity to interest rates. While regional banks can outperform during strong economic expansions, they remain more exposed to net interest margin pressure and credit cycles. As a result, fee-based financial models appear more attractive on a risk-adjusted basis. 

What impact will further rate cuts have on the sector? 

Further rate cuts would likely have a mixed but ultimately supportive impact on the financial sector. While lower rates tend to compress net interest margins for traditional lenders, they can also stimulate loan demand, reduce funding costs, and support broader economic growth, improving credit quality. Rate cuts may also boost market confidence and asset values, benefiting wealth and asset management firms through higher fee income. Insurance companies could face some pressure on reinvestment yields, though this may be partially offset by capital gains on existing portfolios. Overall, while margin compression may be the near-term effect, the longer-term implications of easier policy are generally constructive. 

The topics and investments discussed above do not indicate a recommendation to buy or sell any security. Prior performance does not indicate future results. Please consult with a financial and/or tax advisor before making investment decisions.