The S&P 500 Index is set for another year of double-digit gains, building on its strong 23.3% rally in 2024 and 24.2% in 2023. The index has gained 17.7% as of Dec. 29, 2025.

From post-election optimism to tariff shocks, persistent inflation, a weakening job market, the longest U.S. government shutdown and growing concerns about the AI sector's overvaluation, markets faced non-stop twists this year. But thanks to the Federal Reserve rate cuts, easing trade tensions and expectations of solid corporate earnings, Wall Street is entering 2026 in a position of strength. Driven by this optimism, almost all sectors within the S&P 500 Index have rallied this year. Among the top five is the Financial Services sector, which has appreciated 14.5%. 

The largest constituents of the sector, banks, are in the spotlight as the Fed lowered interest rates and the overall operating environment turned favorable. As such, the S&P 500 Banks Industry Group Index has gained 31.6%. Of the banks that are part of the S&P 500 Index, Citigroup (C Quick QuoteC - Free Report) , BNY Mellon (BK Quick QuoteBK - Free Report) and Northern Trust (NTRS Quick QuoteNTRS - Free Report) have jumped more than 35%.

Price Performance
 

Image Source: Zacks Investment Research

Catalysts for Bank Stocks in 2026

Amid favorable interest rates, improving credit demand and solid capital markets activities, 2026 is shaping up to be another potentially strong year for the banks. After several years of volatility, thanks to Fed rate hikes and inflationary pressures, banks may finally find themselves in a more favorable macro environment.

The Fed slashed interest rates three times this year, with rates currently at the 3.50-3.75% range. The central bank hinted at one more cut in 2026. This could go up as the latest economic data suggests further softening of the labor market and declining consumer confidence. As borrowing costs fall, demand for loans (both wholesale and retail) is expected to rise with decent economic growth providing support. 

Additionally, if risk-on sentiment in the market holds (assuming the so-called AI bubble doesn’t burst), long-term bond yields are likely to rise, while short-term yields will decline due to the Fed’s rate cuts. This would steepen the yield curve, a positive for the banking sector, which will boost banks’ net interest margin (NIM). This, along with rising loan demand and changes in capital requirement regulations, is expected to drive net interest income (NII) higher.

With the economy holding up, capital markets should strengthen. After a volatile start to 2025 amid tariff and geopolitical shocks, the rebound in mergers & acquisitions (M&As) signals a broader reset. Buyers are adjusting to uncertainty as financing eases and confidence in long-term growth improves. In 2026, M&A deals are expected to skew toward de-conglomeration and buy-and-build strategies rather than risky transformations. Hence, banks with the advisory business are set to record higher fee income.

3 Banks With Stellar 2025 Performance & More Room to Run

Citigroup has had a very impressive 2025, with its business transformation plan showing clear signs of success. The bank continues to emphasize growth in core businesses through streamlining consumer banking operations globally. It has successfully exited from consumer banking businesses in nine countries. These initiatives will free up capital and help the company pursue investments in wealth management and investment banking (IB) operations, which will stoke fee income growth. 

Additionally, Citigroup has been witnessing improvement in NII, which is supporting its top-line growth. The company is also broadening its presence in the lucrative private lending business through strategic collaborations. While management projects 2025 NII (excluding Markets) to rise 5.5% year over year, the metric is expected to continue expanding on the back of stabilizing funding costs and decent loan demand going forward. The company anticipates total revenues to exceed $84 billion in 2025, with revenues projected to see a 4-5% CAGR through 2026.

Further, Citigroup announced a major realignment to simplify governance by removing management layers and streamlining leadership. In January 2024, it said it would cut 20,000 jobs (about 8% of staff) by 2026 and has already reduced headcount by more than 10,000. Along with consumer banking divestitures, these moves are expected to generate $2-$2.5 billion in annual run-rate savings by 2026.

With the C stock up almost 68% this year, the above-mentioned developments and factors are likely to drive investor optimism in 2026. The company carries a Zacks Rank #3 (Hold), at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Earnings Estimates
 

Image Source: Zacks Investment Research

BNY Mellon’s dominant position as the world’s leading global custodian (with more than $57 trillion in assets under custody and/or administration or AUC/A) provides a stable and growing base of fee income. This scale advantage drives steady growth in investment services. The company’s ability to attract additional client assets bolsters its fee income, strengthening top-line performance through varying market cycles.

Additionally, lower interest rates are expected to result in stabilized funding costs and support NIM and NII expansion. The company expects NII to jump 12% year over year and fee income to rise modestly this year. 

BK is in the midst of a major technological upheaval. Management’s multi-year “operating model” transformation, including platform consolidation and process automation, is yielding faster service delivery and cost savings. This has also enabled the company to deliver positive operating leverage and enhanced profitability. It is also trying to expand its presence in international markets through growth initiatives, including launching new services, digitizing operations and making strategic buyouts. 

With BK shares up almost 53% this year, changes in business model and positive operating leverage are likely to drive investor optimism in 2026. BNY Mellon also carries a Zacks Rank #3. 

Earnings Estimates
 

Image Source: Zacks Investment Research

Northern Trust’s key strength is its organic growth, as reflected by its higher trust and investment income and loan growth story. Going forward, as the client base continues to expand, the company expects to see a rebound in loan activity, particularly as its wealth management services attract more clients.

Further, with rates declining, borrowing costs are expected to fall, supporting stronger loan demand. Also, the launch of Family Office Solutions in April 2025, targeting ultra-high-net-worth clients, offers tailored investment and advisory services and complements Northern Trust’s Global Foreign Exchange business. 

Northern Trust has taken measures to reinstate its operating leverage over the upcoming quarters. The company is focused on disciplined headcount management, vendor consolidation, rationalization of its real estate footprint and process automation. Through such efforts, the company will likely improve productivity and meet its financial targets. 

The ultimate measure of the success of the company’s past efforts was its ability to consistently achieve its financial target of a return on equity (ROE) between 10% and 15%. In the third quarter of 2025, NTRS posted its fifth consecutive quarter of positive operating leverage and achieved an ROE of 14.8%, signaling progress toward sustainable profitability goals.

With the success of its cost-saving efforts and favorable operating backdrop, Northern Trust is well-placed for further improvement in 2026. The bank, whose shares are up more than 36% this year, carries a Zacks Rank #3.

Earnings Estimates
 

Image Source: Zacks Investment Research