Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / How Banks Are Quietly Outperforming Tech This Summer
Transcript
- Lucas: So here we are, first full week of July 2026, and the big story in my book isn't another megacap tech bounce — it's what's happening under the hood in financials. Luna: You're looking at JPMorgan up over 4 percent in five days, Bank of America up over 5 percent, while the Nasdaq is down one and a half percent. That's a pretty sharp rotation. Lucas: Exactly. And the question is: is this just a summer fling with value, or is there a structural reason banks are suddenly working? I think the answer is in the yield curve. Luna: The ten-year versus two-year spread has been inverted for like two years. Are we finally seeing it steepen? Lucas: We are. The spread is still negative, but it's been narrowing pretty steadily since April. And here's the thing — bank profitability is tied to the slope of the curve, not the level. They borrow short, lend long. When the curve steepens, their net interest margin expands. Luna: But the market is also pricing in three rate cuts by year-end. Usually that would hurt banks because lower rates compress NIM. So why are they rallying? Lucas: Because the cuts are being priced in for the right reasons — the economy is cooling but not collapsing, and the curve is steepening because long-term rates are staying sticky while short-term rates are expected to fall. That's actually the sweet spot for banks. Luna: So it's the classic 'good news is bad news for tech, good news for banks' dynamic. If the economy soft lands, financials benefit. Lucas: Right. And here's a specific number that grounds it. JPMorgan's net interest income last year was around $90 billion. Every 10 basis point improvement in their net interest margin adds roughly 2 billion to pretax profit. So a steepening curve has real dollar impact. Luna: But not all banks are created equal. Bank of America is much more rate-sensitive on the deposit side because they have a huge consumer book. JPMorgan has more non-interest income from investment banking and trading. Lucas: That's the key distinction. When you're stock picking in this space, you have to look at net interest margin sensitivity. BAC's NIM is more leveraged to short-term rates because their deposit costs are slower to rise. JPMorgan has a bigger buffer from fee income. Luna: So the trade is not just 'buy banks' — it's 'buy banks with the right deposit franchise.' Lucas: Precisely. And that's where a metric like net interest margin, or NIM, becomes your screening tool. Compare NIM trends quarter over quarter. Look for banks where NIM is expanding even as the Fed cuts. That tells you they have pricing power on loans and sticky deposits. Luna: If this episode is helping you think about stock picking in a more targeted way, honestly that's the whole point of this show. And the reason we can keep having these conversations without ads is listeners who chip in. If today was useful, you can find us at buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small way to keep the research flowing. Totally optional, but it helps us stay independent. Luna: Alright, back to banks. So Lucas, you mentioned screening for NIM expansion. Can you walk through a concrete example of how you'd do that? Lucas: Sure. Take Bank of America. In Q1 2026, their NIM was 2.11 percent, down a few basis points from Q4 2025. That's not great. But JPMorgan's NIM was actually up slightly to 2.15 percent. The difference comes down to deposit mix. Luna: BAC has a lot of low-cost checking accounts that don't reprice quickly. So when short rates rise, their funding costs lag, which helps NIM. But when rates fall, those deposits stay sticky, and NIM compresses because loan yields reset faster. Lucas: Exactly. So if you believe rates are coming down, JPMorgan's more diversified revenue mix gives it a cushion. Their investment banking and trading revenue actually rises when markets are volatile. That's why JPMorgan's stock is up 7 percent year-to-date while BAC is up about 12 percent. Luna: BAC is actually outperforming JPMorgan this year so far. That suggests the market is pricing in that BAC's NIM compression might be temporary. Lucas: Or that BAC is cheap on a price to tangible book basis. BAC trades at about 1.7 times tangible book, JPMorgan at 1.9. So BAC has more room to rerate if earnings hold up. Luna: But both are well above the sector average of 1.3 times. So you're paying a premium for quality either way. Lucas: Right. And that's the stock picker's challenge. You're not looking for bargains in the traditional sense. You're looking for banks that can grow earnings per share even as the macro slows. That's where the moat comes from. Luna: What about regional banks? They're cheaper, but they have less deposit stickiness. Lucas: Regional banks are a different beast. Many have a lot of commercial real estate exposure, and that's a headwind right now. The Russell 2000, which is full of small banks, is down 1.4 percent over the last five days. So the rotation is really into large-cap financials, not the whole sector. Luna: So it's a quality trade, not a value trade. You're buying the large banks that can weather the rate cycle and still grow dividends and buybacks. Lucas: Exactly. And that's the takeaway. When you see a sector rotation like this, don't just buy the sector ETF. Dig into the specific drivers of earnings. For banks, it's NIM sensitivity, deposit mix, and non-interest income. Apply that filter, and you'll find the names that can compound. Luna: And if you want to track NIM yourself, it's reported in the quarterly filing. You can also use free sites like Morningstar or Yahoo Finance to see the trend. Lucas: Yeah, and compare it to the bank's own guidance. JPMorgan usually gives net interest income guidance for the full year. If they raise it, that's a strong signal. Luna: Alright, so let's check back in a quarter and see if this rotation has legs. But for now, the framework is solid. Lucas: Agreed. Keep your screens tight, and don't chase the hot sector without understanding the earnings engine underneath.