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A decade ago, a financial crisis hit the American economy hard and pushed the banking sector into a full-fledged crisis.

In my opinion, these days US banks are generally well-capitalized and on an earnings tear. Tax cuts, rising interest rates and a robust economy powered bank profits to a record $60.2 billion in the second quarter. That eclipsed the $56 billion in profit that banks earned during the first quarter.

Banking Stocks

The KBW Bank Index, the benchmark stock index for the banking sector, is up 20% over the past year.

The shares of JPMorgan Chase (JPM), also on an earnings roll, are up about 28% over the past year.

Takeaway

But I think not all the news is good for banks, given the storm clouds looming on the horizon.

In my view, one is the fact that the yield curve is flattening. That is, the spread between short-term rates and long-term rates is narrowing.

A flat yield curve often expresses investor pessimism about the future.

An inverted yield curve, in which long-term rates dip lower than short-term rates, has been deadly accurate in predicting economic downturns.

For now, though, in my opinion, the banks are in a good spot and a universe away from the dark days of the US financial crisis.

This material is not intended as investment advice. IBKR Asset Management or portfolio managers on its marketplace may hold long or short positions in the companies mentioned through stocks, options or other securities.

This material is from Interactive Brokers Asset Management and is being posted with Interactive Brokers Asset Management’s permission. The views expressed in this material are solely those of the author and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

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Xavier Brenner

Xavier Brenner has covered global market, business and economic trends since 2013 for Interactive Brokers Asset Management, a robo-advisor offering actively and passively managed portfolios and a division of the Interactive Brokers Group.

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