Shares of financial companies and banks outpaced the broader market in the post-FOMC rally on Wall Street on Thursday.

Early afternoon trade saw the Financial Select Sector SPDR Fund XLF gain 2.9%, compared 1.6% to the. Bank of America Corp. (NYSE:) gained 2.6%, Citigroup Inc. (NYSE:) gained 3%, and JPMorgan Chase & Co. (NYSE:) gained 1.9%.

All stocks above are neutral.

Banks In a Good Spot

Banks are in an excellent spot these days.

First, they stand to benefit from the Fed’s policy of “tapering but not tightening,” meaning rolling back its bond-buying program, but leaving short-term interest rates unchanged.

That’s music to the ears of bankers, as this policy is expected to push long-term interest rates higher, widening the difference between long-term and short-term interest rates (called the “spread”). That’s something already evident in the U.S. Treasury market today, where the 10-year Treasury bond yields have climbed above 1.4%.

A wider spread benefits banks, who borrow from depositors and lend money at the longer end of their yield curve.

A strong housing market and recovering economy will also benefit banks. Recent sales of homes have slowed due to low inventory and delays by homebuilders.

The economic recovery will also keep loan defaults and delinquencies down, which could allow more money to be available for loans.

Third, banks could benefit from the easing of global financial instability caused by Evergrande’s (EGRNF) woes.

Wall Street’s Take

Banks have a strong analyst following, with Moderate to Strong Buy ratings.

Citigroup has been rated as a Strong Buy while JPM Securities and Bank of America have been rated moderate buys.

Apparently, there’s some concern in the analyst community about insider selling, decreased hedge fund activity, and the rise of peer-to-peer lending that could undermine conventional financial intermediation. Analysts are also concerned about the “buy now pay later” trend, which could endanger the credit business of big banks.

Bottom Line

Financial stocks and banks are well-positioned for further gains as they have the Fed and the economy on their side.

Disclosure: Panos Mourdoukoutas did not hold any position at the time this article was published.

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