US banks are back after clearing Fed stress tests

Prior to Friday, financial shares were laggards when it came to the market’s performance, with S&P 500 financial stocks down 3.5% in aggregate. Year-to-date, they were down almost 5%.

These losses could trim, with the shares of major banks moving higher on Friday.

Ticker Security Last Change Change %
JPM JPMORGAN CHASE & CO. 146.45 +0.72 +0.49%
WFC WELLS FARGO & CO. 41.56 +0.33 +0.80%
GS THE GOLDMAN SACHS GROUP INC. 328.84 +0.95 +0.29%
MS MORGAN STANLEY 83.03 -0.26 -0.31%

The movement was in reaction to the majority of banks passing the Federal Reserve’s stress tests on Thursday.

“Although financials rallied after this report, it should be noted that they were weak leading in and many investors thought the sector was broadly oversold,” according to Shawn Cruz, manager, Trader Strategy, TD Ameritrade. He noted that S&P 500 financials fell for 13 straight days leading up to the tests as they remained under pressure from the flattening yield curve, mixed results from Part 1 of stress tests and global trade issues.

The U.S. arm of Deutsche Bank failed for the third time in four years. While overall it passed the test, Goldman Sachs and Morgan Stanley will have to keep their shareholder payouts at current levels. The investment banks experienced a one-time drop in capital ratios, due to the recent passing of tax reform,  according to the Federal Reserve.

The point of the stress tests are to determine if banks are properly capitalized to withstand a financial crisis. They were implemented following the Great Recession. According to the Fed, the 35 banks that it stress tested have built up an extra $800 billion in capital since the start of 2009.