Markets Brief: Are Bank Stocks Expensive?

Insights into key market performance and economic trends from Dan Kemp, Morningstar’s global chief research and investment officer.

Earnings Season Bows Out

Stocks resumed their positive trajectory last week, rising 2.1% as the third-quarter earnings season drew to a close. Energy companies led the way, climbing 3.2% despite suffering the worst earnings decline of any sector in the quarter, falling 23% year over year. As a cyclical business, it is not unusual for energy stocks’ past results and current attractiveness to appear mismatched, and this proved true again. Morningstar analysts continue to believe the sector is a little undervalued.

Banks Get a Lift

In contrast, financials saw the highest earnings growth at a sector level, and this strength is expected to continue this quarter, since the same period was comparatively weak last year. The banks that make up most of this sector are also expected to benefit from the policies of the incoming Trump administration. However, analyst Maoyuan Chen believes these tailwinds are already reflected in their prices. Although banks appear a little overvalued at an industry level due to the dominance of JPMorgan Chase JPM (which accounts for 34% of the Morningstar US Banks Index), we continue to see value in smaller banks. This reflects the growing need to be selective when investing as prices rise.

The Strength of the Dollar

Stocks outside the United States lagged, partly due to the US Dollar Index rising 0.8% over the week, reaching its highest point since November 2022. The Morningstar Developed Markets ex-US Index and the Morningstar Emerging Markets Index were almost flat in US dollar terms, rising 0.3% and 0.2%, respectively. The dollar’s strength challenges investors seeking diversification, as it drags on returns and further concentrates the future value of overseas investing in currency movements. Since currencies can depart from their fair values for long periods, you shouldn’t rely too much on them reverting to those values. Instead, seek overseas assets that are attractive in their local currencies as well as US dollar terms. This is the topic of the first article in our 2025 outlook.

Inflation Back on the Agenda

With fewer companies reporting and the election’s impact fading, market commentators will likely focus on inflation again this week, with the latest Personal Consumption Expenditure data being announced Wednesday. Core PCE over the last 12 months is expected to be 2.8%, up from 2.7% last month. If the result is higher, we can expect a further erosion of confidence in an interest rate cut happening when the Federal Reserve Open Market Committee next meets in December, and consequently some volatility in asset prices. You can review the economic events for the coming week on our calendar.

Highlights of this Week’s Market and Investing Events

• Tuesday, Nov. 26: Minutes from the November Federal Open Market Committee Meeting, November Consumer Confidence Survey, October New Home Sales, earnings from Macy’s M
• Wednesday, Nov. 27: October Personal Income and Outlays report, October Durable Orders
• Thursday, Nov. 28: Markets closed in observance of Thanksgiving
• Friday, Nov. 29: November Chicago PMI, Markets closed at 1:00 p.m. EST in observance of Thanksgiving

For the Trading Week Ended Nov. 22

• The Morningstar US Market Index rose 2.07%.
• The best-performing sectors were consumer defensive, up 3.14%, and energy, up 3.12%.
• The worst-performing sector was communication services, up 1.46%.
• Yields on 10-year US Treasury notes fell to 4.41% from 4.43%.
• West Texas Intermediate crude prices rose 5.81% to $71.24 per barrel.

Stock Highlights for the Week

• Of the 881 US-listed companies covered by Morningstar, 702, or 80%, were up, three were unchanged, and 176, or 20%, were down.

Which Stocks Are Up?

Snowflake SNOW, Williams-Sonoma WSM, Amer Sports AS, Elastic ESTC, and EVgo EVGO were the top performers among US-listed stocks covered by Morningstar analysts.

Best-Performing Stocks of the Week

Which Stocks Are Down?

Evotec EVO, Target TGT, GDS Holdings GDS, PDD Holdings PDD, and Iqiyi IQ performed worst among US-listed stocks covered by Morningstar analysts.

Worst-Performing Stocks of the Week