Regional bank stocks are poised to rally 15% as sector stabilizes and sentiment 'near absurd' levels, Fundstrat says

• Regional bank stocks are poised to rally 15% in coming weeks, Fundstrat's Tom Lee said.
• Lee pointed to a recovery among regional lenders after sentiment approached "absurd" levels last week.
• But he acknowledged longer-term risks loom for bank stocks until the Fed cuts interest rates.

Regional bank stocks are poised to rally in the coming weeks, as banking volatility stabilizes and investor sentiment approaching "absurd" levels, according to Fundstrat's head of research Tom Lee.

Lee, who has been bullish on stocks through most of the past year's bear market, pointed to the stabilization in regional bank stocks in the aftermath of recent banking failures. Troubled lenders, like PacWest and Western Alliance, have eked out a small recovery after plunging last week on fears of more weakness following First Republic's failure.

Regional deposits rose $6.4 billion over the last week, and lending increased by $30.6 billion, according to Federal Reserve data - reflecting a rebound in investor sentiment that's been "near absurd" levels, Lee said.

That's largely due to the Fed's 25 basis-point rate hike last Wednesday, with investors expecting the Fed to pause rates at their next policy meeting before cutting rates later in 2023. That could be bullish for stocks and regional bank stocks in particular, since experts say banking troubles were set in motion by the aggressive rise in interest rates over the past year.

"There is a 'Fed put' on regional banks temporarily," Lee said in a note on Monday, pointing to expectations that the central bank would pull back on rate hikes to avoid putting pressure on the banking sector. He predicted a rally of at least 10-15% over the next six weeks for regional banks, echoing earlier predictions from Fundstrat strategist Mark Newton, who said regional banks hit a bottom last Friday due to seller exhaustion.

That comes less than a week after the collapse of First Republic Bank, which reignited fears of more banking failures. Some experts, like JPMorgan CEO Jamie Dimon, have said that banking failures are largely over, though markets could face more trouble as banks pull back on lending and tighten financial conditions even further.