Top analyst Mike Mayo believes Wall Street is underestimating financials ahead of earnings season.
Mayo, who follows large-cap banks for Wells Fargo Securities, suggests investors haven't fully acknowledged the benefits associated with the booming stock market — from merger to wealth management fees.
"It's bull market banking," the firm's managing director told CNBC's "Trading Nation" on Thursday. "It's a good time to be long banks."
His outlook comes amid enthusiasm for financials. The SPDR S&P Bank ETF just saw its fourth positive session in five, up 0.77% on Thursday. It's now risen more than 10% over the past three months while the S&P 500 is up about 1%.
Two of Mayo's top picks, JPMorgan Chase and Bank of America, are on a tear, too. JPMorgan shares are trading at all-time highs and Bank of America is at levels not seen since February 2008, months before the credit crisis.
Yet, Mayo is still questioning investors' attitude toward banks.
"You have credit euphoria. I mean this is night and day versus the global financial crisis," he said. "Banks were stumbling after you came out of the crisis. Now after the pandemic, banks have been a source of strength, and they should have the lowest level of loan losses, in some cases, in history."
Mayo is one of Institutional Investor's topped-ranked analysts. From 1999 until 2016, Mayo had a sell rating on the banking industry. In early 2010, he testified before the Financial Crisis Inquiry Commission, which was formed in the aftermath of the 2008 credit crisis.
His bullish stance on banks now spans several years.
"Banks during the pandemic played very good defense," he said. "Now, banks are ready to play offense."
His positive take on the industry comes with a caveat: loan growth may take longer than anticipated. But Mayo views it as a temporary setback tied to supply chain disruptions and the impact on inventory growth, which is known to spur lending. He also lists the delta variant of Covid as a headwind.
"That may take up some time. But it is likely to come back," Mayo said. "That's what I'll be asking the management teams about during the earnings call."
In addition, he's watching inflation's impact on the banking industry.
"Once interest rates increase, and the yield curve gets steeper, and the short end goes higher — that is going to be a boon for banks and their net interest margins," said Mayo. "That'll be great. Now, if you have too much increase in interest rates and you have inflation, that could eventually be hell."
Mayo suggests it's too early to seriously consider that scenario. His base case is technological advances are making banks more efficient and propelling them into the multiyear bull market.
"This is the point that's most underappreciated about the banks. ... They spent in the last decade retooling with technology," Mayo said. "We are very big on the technology revolution at banks, and we favor those banks that not only look good in the short term, but also in long term."
Disclosures: Wells Fargo Securities' analyst and/or family and the firm own shares of the bank stocks mentioned above. Wells Fargo has investment and noninvestment relationships with the companies, makes a market in their common stock and has been involved in public offerings of securities.