Cash Injection

Image source: Alessandro Pintus - Shutterstock

What's going on?

The biggest US investment banks are expected to report record yearly profits later this month, after they topped themselves up with a couple of boosters of their own.

What does this mean?

There are two main reasons investors are going into banks’ full-year updates with such high hopes. For one thing, America’s banks collect fees for every mergers and acquisition (M&A) they advise on, and 2021 was a record year for dealmaking. For another, America’s banks – which prepared for the worst when the pandemic first broke out – set aside plenty of cash in case pandemic-stricken borrowers couldn’t pay off their debts. And when it became clear that their customers were back on more stable footing last year, they gradually started to release the money back into their businesses – and their bottom lines crept up as a result.

Why should I care?

For markets: Come for the deals, stay for the stability.
There are no guarantees that the dealmaking boom will keep going this year, but banks are in a strong position regardless: the US Federal Reserve has promised to raise interest rates, which will allow them to earn more on the loans they offer. That’ll come as welcome news to investors: loans are a much more stable source of revenue than M&A, which tends to ebb and flow with the economic tide. Put simply, banking stocks – which already rose 35% in 2021, versus the wider market’s 27% – could be in for another good year.

For you personally: Buy banks, ditch tech.
A very good year if the rate-hike speculation is to be believed: Goldman Sachs said on Monday it reckons the Federal Reserve could raise rates four times this year (tweet this). So if you’re looking to make room for bank stocks in your portfolio, here’s an idea: scale back your investments in fast-growing tech companies, whose future profits become worth less discounted back to today when rates are on the rise.

Originally posted as part of the Finimize daily email.

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