A More Hawkish Fed Changes the Math for Big Bank Stocks. Here's How.

Large banks have been enjoying a pretty favorable interest rate environment since the Federal Reserve started easing rates in 2024 and 2025.

Over the past three years, the KBW Nasdaq Bank Index, which tracks large banks, has risen some 135%. JPMorgan Chase (JPM 0.27%) stock has returned 34%, 41%, and 27% in each of the past three calendar years, respectively. Wells Fargo (WFC +0.26%) has had similarly strong returns over the past three years, as has Bank of America (BAC 0.28%), although BAC had a weaker 2023, returning just 2% in 2023 followed by returns of 30% and 25% in 2024 and 2025, respectively.

Since 2024, rates have dropped from a high of 5.50% to the current 3.50% to 3.75% range. This has been a favorable range for banks because it allows them to still charge high interest rates on loans but not too high to curtail loan growth. In addition, large banks have the advantage over smaller banks with the diverse services they can offer. It enables them to retain customers while keeping deposit rates lower, increasing the net interest income.

The results speak for themselves, as large banks have seen steady loan growth, higher net interest income, and rising stock prices. In the most recent quarter, JPMorgan Chase saw loans grow 11% and net interest income rise 9% year over year.

For Wells Fargo, loans were up 10% and net interest income rose 5%, while Bank of America saw 9% growth in both loans and net interest income year over year.

But rates have not budged since December of 2025, and bank stocks stagnated, particularly earlier this year. The malaise is due to several factors, namely geopolitical tensions, macroeconomic headwinds, and growing uncertainty that rates will continue to drop.

In fact, they may start to go back up. What does this potential dynamic mean for large banks?

Rates now expected to rise

At the most recent Federal Open Market Committee (FOMC) meeting on June 16 to June 17, the committee held rates in check. But for the first time in recent years, there is real momentum to not lower rates but raise them. In the latest dot plot, or summary of projections, the majority of FOMC members now see rates rising by some 25 basis points in 2026 to a median of 3.8%.

In March, the dot plot called for rates to hold steady with the median targeted at 3.6%. In December 2025, the median rate among members was 3.4%, which would indicate rates would decline by 25 basis points.

So, that shows that sentiment for a rate cut in 2026 has mostly disappeared. It now appears that rates could actually rise this year. That could change, but right now, banks are looking at the potential for a rising rate environment. How does this change the calculus?

Is this good or bad for banks?

The latest dot plot seems to reinforce the higher-for-longer scenario, meaning rates will stay somewhat elevated for several years. The key question is, how much higher?

If rates temporarily rise but then settle or even drop back down, I don't think it will have a major impact on banks. Even at the 3.75% to 4% range or the 4% to 4.25% range, it is still somewhat of a sweet spot for banks. The move to raise rates would be designed to cool inflation and support job growth -- the Fed's dual mandate -- with the idea of spurring economic growth, which would be good for banks and lending.

But over the longer term, the FOMC, at least at this point, still sees rates trending lower in 2027, 2028, and over the longer run. The projected rate is 3.6% for 2027, 3.4% for 2028, and 3.1% beyond that.

So, longer term, I don't think the higher-for-longer scenario is necessarily bad for banks if they stay within projected ranges. If they push rates over 4.50% or 5%, that would be negative as it would likely slow loan growth and perhaps lead to lower credit quality, which would result in higher provisions for credit losses and a drag on earnings.

Investors don't seem overly concerned about the Fed projection for rates to possibly rise. Following the June 17 FOMC statement, the KBW Nasdaq Bank Index dipped a bit as a knee-jerk reaction but then started moving higher in the following days. It helps that the big three banks are all reasonably valued.

With second-quarter earnings season coming up in the next few weeks, it will be interesting to watch if the big banks adjust their net interest income outlooks for the fiscal year, given the potential for rising rates. I think all three stocks -- JPMorgan Chase, Bank of America, and Wells Fargo -- remain buys heading into earnings season.