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A man walks past JPMorgan Chase's headquarters in New York City.Reuters

Jamie Dimon, chief executive officer of JPMorgan Chase & Co. JPM-N, continues to warn of an oncoming economic “hurricane” – but investors want bank stocks anyway.

JPMorgan shares rose 16.6 per cent between Oct. 11 and Oct. 18, as part of a rally among U.S. bank stocks, even as Mr. Dimon expressed his belief that the world is heading toward a recession within six to nine months.

U.S. bank stocks within the S&P 500 index were up by 11.6 per cent over the same period, making it the top-performing sector and well ahead of the 4-per-cent rebound in the S&P 500 over a similar time frame.

To be clear, U.S. bank stocks were down as much as 37 per cent this year prior to the rally. They fell 2.9 per cent on Wednesday.

But as investors and strategists contemplate whether the bear market in stocks is close to bottoming out, beaten-up bank stocks appear to be emerging as an early favourite.

Can the nascent rally keep going?

The recent gains follow quarterly reports from many of the key names in the banking sector, which helped kick off the U.S. third-quarter reporting season.

At first glance, the results hardly look like an inspiration to buy bank stocks.

According to Refinitiv, profits for U.S. financials – a group that includes banks, insurance companies and asset managers – so far this reporting season are down 14.8 per cent from the same quarter last year.

Part of the problem here was that investment banking activity is in a weak stretch as deal-making falters.

Gerard Cassidy, an analyst at Royal Bank of Canada RY-T, said the top five U.S. players on Wall Street reported that capital-markets-related revenues fell 15 per cent, over all, from last year.

That’s the bad news, which was largely expected.

The good news is that higher interest rates are translating to fatter margins on bank loans, driving the banks’ net interest income higher.

At JPMorgan, net interest income in the third quarter jumped 34 per cent from last year, to US$17.6-billion. The bank expects the figure will rise further to US$19-billion in the fourth quarter. Wells Fargo & Co.’s WFC-N net interest income rose to US$12.1-billion, up 36 per cent.

“We expect all the banks to see strong net interest income growth in the fourth quarter and into the first half of 2023 through the combination of mid-to-upper single-digit loan growth and higher net interest margins,” Mr. Cassidy said in a note, referring to JPMorgan, Citigroup C-N, Morgan Stanley MS-N, Wells Fargo, U.S. Bancorp USB-N and PNC Financial Services Group Inc. PNC-N.

As well, analysts noted that U.S. banks are showing promising resilience to a deteriorating credit environment. They are reporting higher capital reserves and are already setting aside money for rising loan losses, suggesting that deteriorating economic conditions aren’t going to catch them unprepared.

Susan Roth Katzke, an analyst at Credit Suisse, highlighted “the clarity of JPMorgan’s preparedness to manage through macro slowing.”

The third-quarter results for U.S. banks that have reported even pushed analysts to raise their profit estimates and target prices on some stocks, or where they see the shares trading within the next 12 months.

Jefferies LLC analyst Ken Usdin raised his target price on Bank of America BAC-N to US$32 from US$28 previously.

He now expects stronger net interest income will drive the bank’s earnings to US$3.05 per share in 2023, up from his previous estimate of US$2.70.

Still, some observers remain cautious on bank stocks in the near term, given that the U.S. Federal Reserve and other central banks appear willing to sacrifice economic growth to control soaring inflation.

“It’s too early to buy bank stocks,” James Fotheringham, an analyst at BMO Capital Markets, said in a note. Valuation alone is not a reliable catalyst, he said, adding that shares will probably struggle until the economic outlook becomes more certain.

Perhaps some investors want to get ahead of the hurricane – or are even hoping it doesn’t appear.

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