As the Federal Reserve approaches a widely anticipated interest-rate cut cycle, traders are evaluating which sectors could benefit the most from lower rates.
One key question on many minds is whether regional banks might outperform their larger counterparts in the coming months.
Since the start of 2024, shares of regional banks, tracked by the SPDR S&P Regional Banking ETF (NYSE:KRE), have risen about 9%, poised to end a two-year losing streak.
However, this performance lags behind that of larger financial institutions, with the Financial Select Sector SPDR Fund (NYSE:XLF) up 18% year-to-date. Despite this, the third quarter has seen a notable shift, with regional banks outpacing larger banks by 6 percentage points.
One of the main factors behind the recent outperformance is the growing anticipation of lower interest rates. As illustrated in the chart below, the KRE-to-XLF ratio has recently risen in tandem with a decline in the 2-year Treasury yield, which serves as a benchmark for short-term interest rate expectations.
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