Advisors say financial stocks ready for another run in 2026

Bulge bracket bank stocks, well, bulged in 2025 thanks to a slew of megadeals and a dovish Federal Reserve.

The question now facing advisors is whether they should bet on another big year for the banks, both big and small.

The Invesco KBW Bank ETF (Ticker: KBWB), which features significant stakes in banking behemoths like Morgan Stanley (Ticker: MS) and Goldman Sachs (Ticker: GS), was up almost 30% in 2025, nearly double the 16% return for the entire S&P 500. Helping propel the nation’s biggest banks last year was a record 68 announced deals valued at more than $10 billion, according to LSEG. All those massive transactions lifted the average annual deal size to a healthy $223.1 million in 2025, LSEG said.

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Dory Wiley, president & CEO of Commerce Street Holdings, says additional M&A activity along with stable margins create “a recipe for a good outcome” in banks in 2026. As to what would make him bearish, Wiley says it would be a credit collapse of any kind.

“High yield, structured credit, private credit, this would crush bank prices even if overblown,” Wiley said.

Noah Damsky, principal at Marina Wealth Advisors, agrees that financials will be among the market leaders in 2026. As the Fed continues to cut rates, Damsky believes short-term interest rate declines will outpace the drop in intermediate and long-term rates, which would steepen the interest rate curve.

“This would continue to be a tailwind for financials, support interest rate margins, and encourage lending activity,” Damsky said.

Along similar lines, Tracy Byrnes, vice president of women & investing at Lebenthal Global Advisors, says the market is moving into a “Goldilocks environment" where credit demand is picking up and the investment banking world is "waking up." Like Damsky, she believes the banks will profit from a steeper yield curve enabling them to "borrow cheap and lend higher." She also feels President Trump’s 'One Big Beautiful Bill' will cut corporate tax bills, which means more cash for dividends and buybacks.

As for the potential bear case for the banks, Byrnes says it would come from weakness in the labor market, if anywhere. 

“Any hiccup in the job market could make investors a little nervous about credit quality,” Byrnes said.

All that said, Christian Salomone, chief investment officer at Ballast Rock Private Wealth, says investors should be more selective heading into 2026 despite the strong performance of financial stocks in 2025. In his view, Federal Reserve rate expectations and regulatory tailwinds appear largely priced into large-bank valuations, with many trading at or above historical price-to-book levels. That suggests further outperformance will depend less on multiple expansion and more on continued earnings growth, particularly from fee-based businesses such as investment banking and wealth management.

“From an allocation standpoint, we view financials as a value and income complement to a diversified equity portfolio, rather than a pure growth driver,” Salomone said, adding that rising credit losses or macroeconomic shocks could quickly pressure profitability.

BIGGEST BANKS MAY NOT BE BEST

As to which sector within financials will lead the way in 2026, Commerce Street’s Wiley says wealth managers should look to regional and small cap banks. In his opinion, the “big run-ups” in money center banks has already happened.

Marina’s Damsky, meanwhile, is looking for alternative investment and private equity firms to rebound after a rough 2025.

“Valuations of their private market investments are hanging in there, so I expect them to generate meaningful profits via carried interest. With valuations elevated broadly, management fees are still strong contributors to the bottom line,” Damsky said, further noting that his biggest concern in the sector is the private credit markets because BDCs could “continue to stumble.”

Moving on, Lebenthal Global’s Byrnes also says leadership within the financial sector will come from beyond the bulge bracket. In her view, regional and small-cap banks will feel the “most relief” from lower funding costs and a domestic-focused economy.

Finally, Ballast Rock’s Salomone sees wealth management firms leading financial sector performance in 2026. Companies with large wealth management platforms are better positioned than traditional lenders to navigate market volatility due to recurring asset-based fees, durable client relationships, and less balance-sheet sensitivity to interest rates, according to Salomone.

“While regional banks can outperform during strong economic expansions, they remain more exposed to net interest margin pressure and credit cycles. As a result, fee-based financial models appear more attractive on a risk-adjusted basis,” Salomone said.