Why Banks Led in 2025 — JPMorgan Sees Momentum into 2026

A sustained steepening of yield curves created a rare tailwind for banks

The global rise in interest rates that began in 2022 materially changed the operating environment for banks. By 2025 the combination of higher short-term rates and a return of steeper yield curves improved margins across loan books and fixed-income portfolios. JPMorgan projects this dynamic will remain a core support for the banking sector into 2026.

Why a steeper yield curve helps banks

• A steeper curve typically expands net interest margins (NIM), because banks can reprice new loans and investments at higher long-term rates while funding costs reset more slowly.
• Deposit repricing and loan yields react at different speeds; the resulting spread improvement is a primary channel for stronger bank profitability.
• Banks with large commercial lending books and diversified deposit bases are better positioned to capture the benefits of curve steepening.

What drove bank outperformance in 2025

• Banks outperformed technology in 2025 as investors reweighted toward sectors benefitting directly from higher yields and a steeper curve.
• European financials notably led the move, illustrated by flows and performance in the New York–listed iShares MSCI Europe Financials ETF (EUFN), which served as a focal point for investor exposure to the region.
• Policy and regulatory shifts that relaxed constraints on capital deployment and revenue generation were a complementary factor in the sector rerating.

Structural and policy factors to monitor for 2026

• Yield-curve slope: Continued steepening or stability of a steeper curve will remain the primary macro driver of bank profitability.
• Central bank guidance: Any durable pivot toward meaningful rate cuts would compress margins and could slow the sector’s momentum.
• Regulatory posture: Deregulatory measures that affect capital, liquidity, or lending standards can materially affect bank valuations and return on equity.
• Credit quality and loan growth: Improved NIM is beneficial only if credit quality remains stable and loan origination sustains or grows.

Practical considerations for traders and institutional investors

• Monitor NIM trends and quarterly bank reporting for signs of margin expansion or compression.
• Watch deposit beta — the rate at which deposit costs rise when market rates increase — as a critical sensitivity for bank profitability.
• Use sector and regional ETFs for tactical exposure: EUFN provides concentrated access to European financials and can act as a barometer for investor sentiment toward that market segment (ticker: EUFN). Broader index exposures via MSCI financials benchmarks can help quantify relative performance (MSCI references).
• For single-name exposure, track large, systemically important banks and major European names such as ING for regional credit and funding dynamics (ticker: ING).

Risk considerations and watchpoints

• A rapid policy-driven downturn that forces rate cuts would reverse NIM gains and likely trigger sector underperformance relative to growth-sensitive sectors.
• Credit deterioration tied to slower economic activity or sector-specific shocks would offset the benefits of higher NIM.
• Valuation resets can occur quickly if market pricing starts to anticipate weaker margins or rising loan-loss provisions.

Investment implications: positioning for 2026

• Tactical: If the yield curve remains steep or steepens further, overweighting bank financials or targeted ETFs that track European financials can capture the cyclical upside.
• Strategic: Allocate to banks with solid deposit franchises, diversified fee income, and conservative credit underwriting to balance NIM upside with downside protection.
• Hedging: Use interest-rate hedges and options strategies to manage downside in a scenario of sudden rate cuts or aggressive policy easing.

Key takeaways

• The return of a steeper yield curve since 2025 materially improved banks’ ability to earn on loan books and fixed-income reinvestments.
• Banks outperformed tech in 2025, led in part by European financials and visible flows into vehicles such as iShares MSCI Europe Financials ETF (EUFN).
• JPMorgan expects the yield-curve-driven tailwind to remain a central support for banks in 2026, but investors must monitor central bank signaling, deposit dynamics, and credit trends.

Quick checklist for traders and analysts

• Track the 2s10s and 3s10s yield spreads weekly.
• Review quarterly net interest margin commentary and deposit beta disclosures from major banks.
• Monitor ETF flows into EUFN and other MSCI financials ETFs as a proxy for investor positioning.
• Watch regulatory announcements that could alter capital or liquidity rules.

This analysis is aimed at professional traders, institutional investors, and financial analysts seeking an actionable, evidence-based view of why the banking sector outperformed in 2025 and why that performance may extend into 2026 under a persistently steeper yield curve environment.