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This key group of stocks could face a major headwind

Market bulls might want to root especially hard for the bank stocks.

After a postelection runup, bank stocks are now barely positive on the year, underperforming the broader market.

During the "Trump rally," investors in financials had priced in the promise of corporate tax cuts and less regulation. More concretely, the Federal Reserve raised rates and expectation for future tightening rose. Together these catalysts propelled the group to highs not seen since before the financial crisis.

The banks' more recent trading pattern stands out to Miller Tabak managing director and equity strategist Matt Maley, who noted the popular S&P Bank ETF (KBE) has been closely correlated to the S&P 500.

"We highlight the banks once again because after a VERY strong post-election rally, they have actually been range-bound for almost two months (just like the S&P)," Maley wrote in a note Wednesday. "Given how closely correlated the KBE & the [S&P 500] have been since the election, how this group acts going forward is going to be very important."

Of course, a big catalyst will be the Federal Reserve's next moves. As widely anticipated, policymakers on Wednesday announced they would leave interest rates unchanged following a quarter-point hike in December, the second increase in a decade.

"We have to worry a little bit about what's going on with interest rates, of course, but it's not just the level of interest rates. We have to worry about the steepness of the yield curve, because that's really where they make their money, in the yield curve. And ... the yield curve has flattened a little bit more than the bank stocks have come down," Maley said Wednesday on CNBC's "Power Lunch."

"So there's a little bit of a gap there that may cause a little bit of a headwind in the bank stocks."

Differences between short- and long-term rates are good for the banks, since the institutions generally borrow money in the short-term and lend it in the long-term.

Erin Gibbs, equity chief investment officer at S&P Global, notes that the group's earnings growth expectations are in line with those of the overall S&P 500, and that banks' valuations have remained in a "range" for a few months.


Based on this, "they'll do at least what the market does," Gibbs said on CNBC's "Power Lunch."


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