US banks enter 2026 with solid backdrop but limited upside

Investing.com -- U.S. banks enter 2026 with a solid operating backdrop, but limited upside for stocks after a strong run.

The banks are well positioned defensively if equity markets turn volatile, but investors should not expect more than mid- to high-single-digit gains from the sector in 2026.

The core fundamentals remain supportive, with pre-provision net revenue set to grow at an above-normal pace, credit quality holding up well and capital levels at historical highs.

Baird downgraded Wells Fargo and KeyCorp to underperform on stretched valuations and limited upside.

Analysts at Baird expects earnings to benefit from a mix of improving loan growth, steady fee income and continued repricing of fixed-rate assets, which should lift net interest margins through the first half of the year.

A more benign regulatory environment is also expected to support bank mergers and higher capital returns through buybacks and dividends.

Though the valuations already reflect much of the good news. Bank stocks are trading about 5% to 10% above fair value on an absolute basis, leaving the group with a balanced to slightly negative risk-reward profile.

While banks remain cheaper than the broader equity market, but relative value alone is not enough to drive meaningful upside from current levels.

Baird analyst see loan growth to improve modestly in 2026 to around 3% to 4%, helped by lower short-term rates and easing commercial real estate paydowns.

Fee income should remain supported by active capital markets and continued merger activity, though expectations are already high. Credit costs are seen normalizing gradually, with losses remaining manageable as underwriting standards and capital buffers stay strong.

Baird said regional banks offer better value than money-center peers, given a wider valuation gap. The firm favors names such as Fifth Third, Comerica, Huntington, Zions, PNC, M&T Bank, Capital One and Simmons First National.

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