U.S. Bank Stocks to Rally in the Second Half of 2025: Bowman, Regulation, Trading Activity, and Rate Cuts

TradingKey - As U.S. tech stocks hit new highs, Wall Street analysts expect the next sector poised for strong performance could be U.S. bank stocks, driven by potential easing of capital and merger regulations by the Federal Reserve, along with a surge in trading activity.

As of June 25, the KBW Bank Index closed at 136.29, rising 6.92% year-to-date in 2025 — outperforming the S&P 500’s 3.58% gain. At the same time the Nasdaq 100 Index recently reached record levels, the bank index still remains about 7% below its all-time high recorded in 2022.

KBW Bank Index, Source: MarketWatch

Before last year's 33% rally, the KBW Index had declined for two consecutive years. Analysts believe that under the backdrop of the Trump 2.0 administration’s promise to ease financial regulation and the appointment of Michelle Bowman as Fed Vice Chair for Supervision, bank stocks are likely to continue rising this year.

Wells Fargo analyst Mike Mayo pointed out that banks are facing a triple opportunity: the biggest regulatory shift in 30 years, improving operating leverage, and increased revenue. Mayo said that as long as there is no economic recession, bank stocks will keep climbing.

On Wednesday, June 25, the Federal Reserve announced plans to relax enhanced supplementary leverage ratio (SLR) requirements for large banks, lowering the requirement from the current 5% to between 3.5% and 4.5%, potentially injecting more liquidity into the market.

This proposal was strongly supported by Bowman. Some analysts suggest that under her leadership, bank mergers and acquisitions may become more active — such as the potential acquisition of Northern Trust Corp by BNY Mellon. Previously, under the Biden administration, such deals faced stricter scrutiny, causing many M&A transactions to stall.

Morgan Stanley expects that merger approvals will become “faster and more transparent,” with regulatory clarity being key to deal-making.

Investors are now awaiting the results of the Fed’s annual stress tests, scheduled to be released on Friday afternoon, for further signs of eased capital constraints.

Some analysts believe that all major banks are expected to pass this year’s test, which would open room for increased share buybacks and dividend payouts.

However, for bank stocks to sustain a meaningful rebound, the key hurdle remains whether the Fed will cut interest rates earlier than expected. 

High interest rates are a double-edged sword for banks — on one hand, elevated nominal long-term rates hurt trading and wealth management businesses; on the other, regional banks may benefit from a higher net interest margin model.

HSBC noted that as long as high interest rates do not trigger an economic recession or credit issues, maintaining them over the long term is beneficial for bank profitability.