It’s not time to dump megabank shares just yet

The U.S. megabanks appear to be having a “buy the rumor, sell the news" moment. Investors gobbled up shares of these global lenders last year. Now, with banks confirming via fourth-quarter reports that 2025 was indeed a strong year, their shares are tumbling. The four megabanks reporting as of Wednesday are down almost 7% on average this week.

Certainly some sticking points for lenders have emerged from Washington early this year. Will President Trump find a way to make good on a pledge to cap credit-card rates? Could the Federal Reserve cut rates even more aggressively than believed this year, further denting banks’ hopes for growth in interest income? Could growing geopolitical uncertainty quash a rebound in dealmaking?

Even without a crystal ball, investors may view all those swirling questions as reason enough to take some profits after a year of big gains. All six of the U.S. megabanks—Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo—beat the S&P 500 last year.

This move left those banks trading at high valuations. The average price-to-book ratio of the four giant lenders—Bank of America, Citigroup, JPMorgan and Wells—approached 1.8 times earlier this month, according to FactSet data. That is a level not seen in almost 20 years.

Certainly there is risk to banks in an unpredictable political environment. But investors also should consider what seems to be the Trump administration’s broader agenda: supercharge the economy and investment activity, or what is sometimes termed “run it hot."

On the whole, that ought to keep banks firing on most if not all cylinders in 2026. Banks are printing some solid numbers in loan growth, with a lot of that coming from loans to non-bank financial institutions. Likewise, banks are still seeing their trading activity expand, in part through growing financing of their clients.

That would be boosted by lower rates, deregulation and other policy measures. These are meant to encourage many of the kinds of underlying activity that is ultimately driving a lot of this financing, such as investments in data centers and energy infrastructure.

There is also what is happening with bank regulation. A lighter approach to capital requirements would allow banks to continue to allocate more of their resources toward these loans and financing. And because these arrangements are often backed by collateral, they don’t add as much to banks’ risk weightings as traditional unsecured business loans. Not enough “cockroach" losses, in the form of frauds or surprising losses, have emerged so far to derail that growth yet.

Plus, if the bond market reacts as some fear it would to an aggressive Fed or additional fiscal stimulus, driving higher long-term bond yields, that could help banks offset the impact to interest income of lower short-term rates.

Lower short-term funding rates can reduce banks’ deposit costs, while higher bond yields could allow banks to continue to redeploy cash from maturing older bonds into higher-yielding new ones. The shape of the yield curve, or the difference between short- and long-term rates, can matter as much as the level of rates.

Whether a credit-card rate cap could possibly come into effect is naturally a huge unknown risk. What is known, however, is the fiscal stimulus to consumers and businesses that can come from the 2026 budget mix. Larger tax refunds can pad deposit balances and boost spending.

While many lower-income consumers may struggle with benefits cuts, those aren’t the bulk of banks’ borrowing customers, especially not in profitable businesses like wealth management. Higher asset prices could still support more lending growth to the top of the K-shaped economy.

Meanwhile, banks’ higher valuations aren’t stretched relative to the rest of the market. Since 2010, those four big lenders have on average traded at a forward price/earnings multiple that is around 65% that of the S&P 500’s ratio. Today, they’re trading at closer to 55%. It is a similar trend with price-to-book ratios, though that is often a less relevant measure for nonbank companies.

To be sure, banks remain vulnerable to a big economic or market correction. Any such pullback could lead to higher credit losses. And any deleveraging by trading and nonbank customers would curtail loan growth. An accompanying defensive move into government bonds could also lower longer-term yields. The asset values now aiding wealthy customers and growing management fees would turn into a drag.

That said, plenty of investors and economists have been predicting a recession or market downturn for three years now, only for markets and the economy to power ahead.

Will some affordability measures narrowly target banks? Perhaps. Yet if dramatic policy moves were to actually materialize, and a rate cap didn’t materialize, banks would also stand to benefit from things like a big boost to home sales or improved consumer budgets.

As long as investors continue to believe the economy writ large is going to be run hot, big-bank stocks are likely to keep chugging ahead.

Write to Telis Demos at Telis.Demos@wsj.com