Regional Banks Rally on Yield Curve Steepening, Undervaluation

Regional U.S. banks are outperforming the S&P 500 for a third straight month — their longest streak since 2022 — as yield curve steepening and solid earnings fuel investor optimism. The S&P Regional Bank Select Index trades below long-term valuation averages, with 10% of constituents reporting results by January 31, 2026. The $4 billion SPDR S&P Regional Banking ETF (KRE) is up 4.6% YTD, outpacing the S&P 500’s 1.9% gain. Analysts cite improving GDP (4.4% Q3 growth), fading recession fears, and M&A potential as catalysts. Easterly Snow’s Joshua Schachter calls regional banks “the cheapest area of the market.” 22V Research remains overweight, noting reduced premium justification for large banks amid stable credit conditions. Risks include deposit competition from stablecoins and AI-focused capital rotation.