U.S. bank stock earnings season is here: Geopolitical conflicts and private credit risks are mounting—can valuations recover?

After the worst quarterly start in years for U.S. bank stocks, the upcoming earnings reports are expected to serve as a catalyst for a valuation recovery.

Amid ongoing conflict in the Middle East and credit market risk disruptions, Wall Street banking giants have seen their stock prices post their worst declines since the 2023 regional banking crisis. As sector valuations gradually absorb the pressure, the upcoming wave of first-quarter earnings could provide a crucial rebound opportunity for bank stocks.

Starting next Monday, Goldman Sachs will kick off earnings season, followed by JPMorgan Chase, Citigroup, Wells Fargo, Bank of America, and Morgan Stanley. Analysts expect that, thanks to loosened regulations and increased market activity, the six major banks will report strong first-quarter trading revenues. Bloomberg data shows the S&P 500 financial sector’s first-quarter earnings are expected to grow 16%, above the average of 12.5% for all S&P 500 constituents.

However, market focus is not limited to the earnings alone. Analysts point out that private credit risk, interest rate trends, M&A market outlook, and the potential impact of the Middle East conflict on economic growth and inflation are the key variables shaping the future trajectory of bank stocks. In the current complex environment, management's risk guidance may have more market influence than profits alone.

Valuation discount of 40%, bank stocks considered “high quality at a low price”

The KBW Bank Index dropped 6% in the first quarter, its weakest showing since 2023. This contrasts sharply with its strong performance in 2025—the index rose 29% last year, outperforming the S&P 500 and Nasdaq 100. Although the index has rebounded 7.9% since April, it is still trading at only 12 times expected earnings, representing a roughly 40% discount compared to the S&P 500’s 20 times.

JonesTrading Chief Market Strategist Michael O'Rourke stated, from a valuation perspective, the banking industry remains the most fundamentally attractive sector within the S&P 500, and has been in a phase of adjustment and absorption since 2026.

UBS analyst Erika Najarian believes, as major banks have seen their market value shrink amid first-quarter sell-offs, while fundamentals remain largely unchanged, some “quality stocks are now selling at a discount.” On April 7, she upgraded Morgan Stanley to “Buy,” pointing out the strong momentum in direct lending, capital markets, and industry deregulation, which could create buying opportunities for the underperforming bank stocks this year.

Wells Fargo’s Head of Bank Research Mike Mayo also states that, despite management’s guidance trending conservative and market focus on geopolitical risks, long-term investors should see the current pullback as a buying opportunity. He notes that the $8 trillion investment-grade bond market shows bank credit quality is not weaker than ordinary enterprises, yet the stock market gives bank stocks a 40% discount, “which is clearly unreasonable.”

Private credit risk looms, credit quality becomes a key focus

Entering this earnings season, risks hidden in the $1.8 trillion private credit industry have become a shared source of pressure for bank stocks, asset management companies, and commercial development companies.

BofA Securities banking analyst Ebrahim Poonawala says, private credit itself will not fundamentally affect banks’ profitability or outlook, but investors do want more details and explanations in next week’s earnings reports.

Bloomberg Industry Research analyst Herman Chan points out that market attention centers on key guidance, and whether macro pressures have started to cause cracks in credit quality. He adds, if banks provide positive market guidance, it will be seen as a favorable signal.

Conflict trends shape market sentiment, outlook remains uncertain

The evolution of Middle East conflict remains the biggest current uncertainty, and prospects for a ceasefire agreement are variable. Wells Fargo Head of Bank Research Mike Mayo bluntly stated that the conflict’s trajectory will determine the movement of bank stocks. If the conflict escalates in the short term, outcomes are unpredictable, and investors will find it hard to draw firm investment conclusions.

Analysts generally believe that until inflation trends and economic growth prospects clarify, bank stocks will not see sustained rallies. BofA Securities analyst Ebrahim Poonawala remarks, until investors have more clarity on the inflation outlook, any stock market rally may be followed by a period of consolidation, and this assessment process could take weeks or months.

Morgan Stanley analyst Manan Gosalia takes a relatively optimistic stance. He notes, if macro risks recede, most banks could outperform the broader market, citing ample capital available, strong profitability, and low credit risk. He believes most banks’ medium-term trajectories remain achievable, and current low valuations offer an attractive risk-reward setup ahead of earnings season.

Notably, unlike the pressure experienced by major banks this year, regional bank stocks have shown relative resilience, outperforming the big banks and continuing the leadership trend set in 2025. Bloomberg analyst Herman Chan believes, regional banks’ anxiety is relatively limited, as their risk exposure in areas such as non-bank financial institution lending is smaller, and they have not faced the same upward cost pressures as major banks.

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