Jim Cramer says bank stocks could be the new market leaders

CNBC’s Jim Cramer on Monday said that financial stocks are replacing tech names as the new market leaders.

“I always thought the group had the potential to become a leader again, but the banks could never pull it off because the Fed kept rates so low that it was hard for them to make money. Now that’s over,” he said.

Tech stocks soared in 2021 thanks to low interest rates that allowed investors to bet on high-risk, high-growth companies. 

Those names were hammered this year after the Federal Reserve started raising interest rates in order to tamp down persistent inflation, driving investors into lower-risk, defense stocks that can better weather market turbulence. Now, banks are seeing the benefits of higher rates, according to Cramer.

“The Fed’s allowing these companies to make a ton of money by paying you next to nothing for your deposits and then reinvesting that money risk-free in short-term Treasurys,” he explained.

The central bank likely won’t halt its rate-hiking campaign anytime soon. Officials have noted that the increases will continue until inflation shows clear signs of slowing down, according to minutes from the Fed’s September meeting.

Cramer acknowledged that unemployment would increase if the central bank takes the federal funds rate close to 5%, which could result in a high number of bad loans for banks. However, he believes that banks would be able to offset any damage.

“There will be more defaults and delinquencies, but the net interest margin … expansion will more than make up for it,“ he said.