Large U.S. banks rallied to fresh record highs on Wednesday as investors cheered on stronger-than-expected fourth-quarter earnings, driven by resilient lending income, cost-cutting efforts and a rebound in corporate deal-making sending.

The Financials Select Sector SPDR Fund XLF — a widely followed exchange traded fund tracking 88 large financial institutions — rose by 0.6% on Wednesday, surpassing its previous record highs set in late November.

The XLF ETF has now returned 33% over the past year, outperforming the SPDR S&P 500 ETF Trust SPY by about 10 percentage points.

Notably, JPMorgan Chase & Co. JPM, Goldman Sachs Group Inc. GS, Morgan Stanley MS and Wells Fargo & Co. WFC jointly achieved new all-time highs on Wednesday.

Chart: Financial Sector ETF Outperformed Broader Market Over The Last Year

Yet, there might be still plenty of upside ahead according to Goldman Sachs.

In a note shared Tuesday, the bank analyst Richard Ramsden highlighted that large banks posted fourth-quarter 2024 earnings 9% above consensus, with net interest income up 2% and margins improving by roughly 100 basis points.

Looking ahead, the investment bank sees continued strength in 2025, driven by improving loan growth, favorable deposit repricing, and an expected increase in share buybacks. These factors prompted Ramsden to increase valuation multiples and upwardly adjust price targets for the banks under coverage.

“We increase our 12-month target P/Es by 0.5x to reflect higher market multiples, which results in a 4% average increase in the group’s 12-month price targets, with 10% average upside and 13% average total return,” Ramsden wrote.

Navigating Rate Cuts: Banks Find Ways To Protect Margins

While lower interest rates can squeeze bank profits by reducing what they earn on loans, many large banks have been able to adjust their deposit pricing — what they pay customers on savings accounts — more quickly than anticipated.

Faster-than-expected deposit repricing has been a key tailwind for banks, as top institutions saw deposit yields drop 27 basis points quarter-over-quarter, outperforming expectations.

Corporate and wealth deposits have adjusted nearly one-to-one with Fed rate cuts, reducing funding costs faster than initially anticipated.

While most banks have shortened the duration of their securities portfolios to manage capital risk, Wells Fargo & Co. has gone against the grain, adding longer-term agency mortgage-backed securities to its holdings.

Goldman Sachs notes this strategy could provide additional income stability if rates fall more gradually than expected.

Buybacks And Capital Returns Set To Surge In 2025

Goldman Sachs forecasts a 55% increase in bank share repurchases this year, potentially reaching $92 billion — the highest level since 2018.

Citigroup Inc. C has already announced a $20 billion buyback authorization, while JPMorgan Chase & Co. and Wells Fargo have indicated they will ramp up buybacks.

Dividend payout ratios, which currently hover around 30%, could also rise toward pre-2008 levels of 40% to 50%.

Capital Markets Activity Rebounding, M&A Pipeline Strongest in Seven Years

A resurgence in capital markets is fueling optimism, with Goldman Sachs highlighting a sharp recovery in mergers and acquisitions.

“Morgan Stanley noted that its M&A pipeline is at the highest level in seven years,” Ramsden wrote, adding that corporate finance activity could “resemble the mid-90s cycle if both the market and economy hold up.”

Mergers and acquisitions pipelines across the industry have surged 16% since the beginning of 2024, while the top five banks’ pipelines are up 9%, and independent investment banks have seen a 24% increase.

Goldman Sachs also highlighted a “constructive fee income trajectory” at Wells Fargo, with revenue from investment banking and trading expected to outperform consensus estimates by 5% in 2025 and 2026.

Since the beginning of 2024, industry-wide M&A pipelines have jumped 16%, with independent investment banks leading the surge at 24%.

Top Stock Picks: BAC, C, WFC

Goldman Sachs maintains a bullish stance on Bank of America Corp. BAC, Citigroup and Wells Fargo, with Ramsden citing these as “the best-positioned stocks” for 2025.

Bank of America (Buy): Expected to outperform peers with 7% NII growth in 2025 and 6% in 2026, driven by loan expansion and favorable deposit trends.
Citigroup (Buy, Conviction List): The bank remains on track to achieve its medium-term targets, with strategic restructuring and capital efficiencies providing significant upside.
Wells Fargo (Buy): The bank's healthy NII trajectory is bolstered by improved deposit pricing and growing investment banking revenues.

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