When interest rate-cutting cycles hit the stock market, investors typically assume that they will positively affect most stocks, but that’s just not the case. Some could benefit, such as consumer discretionary names and others in the energy sector, considering that consumer and business activity tends to rise after cuts.

However, those who are directly related to the financial sector, like banking stocks, see the effects of interest rate cuts get to them before anyone else. For this reason, investors should understand how changing interest rates affect stocks like Bank of America Co. (NYSE: BAC), J.P. Morgan Chase & Co. (NYSE: JPM), and even corporate finance-focused Goldman Sachs Group Inc. (NYSE: GS).

Even though these names operate in the same industry and offer similar products and services, their business models are exposed to different ends of the economy. Bank of America is more of a consumer and commercial banking stock. At the same time, Goldman Sachs is purely about trading and corporate events like mergers and acquisitions (M&A). On the other hand, J.P. Morgan has a healthy mix of both, so here’s how to play them.

Bank of America’s Weaknesses Could Push the Stock Lower

This is not to say that the stock is weak itself, but rather that the bank's high exposure to consumer and commercial banking trends can bring about some volatility now that interest rates are on the decline. Here's why.

Consumers drove deposits at the bank higher since the Federal Reserve (the Fed) hiked interest rates because high-yield savings accounts now offered enough of an attractive yield to attract more money. Now that the tide is changing, it is likely that Bank of America could experience a net outflow in deposits.

This outflow significantly limits the bank's ability to make loans and, therefore, earn interest income on these loans. Knowing that Bank of America's earnings per share could go down, Warren Buffett decided to trim his holdings during the past quarter.

As the bearish trends started to take hold, traders also offered their views on Bank of America stock. The stock's short interest rose by up to 11.2% in the past month alone, showing signs of bulls starting to get circled by bears raiding this stock ahead of potentially lower earnings.

The Opposite Could Be True for Goldman Sachs: Strengths Set to Drive Growth

On the other end of the spectrum, Goldman Sachs is a bank that could profit from the deposit runs seen in commercial banks. Since consumers will probably be looking for a better place to put their money and expect to see some sort of return, Goldman’s retail investment solutions (like Ayco) come into play.

But it’s not just consumers who could find a home in Goldman Sachs’ offerings. The business cycle could show another tailwind for this bank. As lower interest rates create more business activity, corporate finance could be about to take off, generating massive fees at Goldman.

Since M&A activity relies heavily on ample and flexible financing terms, lower rates bring on the expectation of rising fees and bonuses for bankers, something Wall Street has also noted. Analysts at Morgan Stanley think Goldman Sachs stock could be worth up to $561 a share, daring it to rally by as much as 12.5% from where it trades today.

More than that, those at Legal & General Group decided to boost their stakes in the bank by 2.9% in the past quarter, bringing their net investment up to $1.3 billion today, or 0.8% ownership in the bank. This is only a small drop compared to the $9.6 billion in total institutional capital that made its way into Goldman stock this year.

J.P. Morgan Chase Stock Offers Investors the Perfect Balance of Stability and Growth

This is a bank that deals in a healthy amount of corporate and commercial activity, meaning it can probably weather the storm from both sides. Decreasing deposits causing less interest income? No problem. The corporate finance arm will make up for the shortfall by taking on M&A deals and generating trading profits.

This is why analysts at Deutsche Bank have landed on a $235 price target for J.P. Morgan Chase stock, which calls for a net upside of 11.5% from its current level.

The fact that up to $23.9 billion in institutional capital made its way into the bank this year should tell investors how much perceived safety there is with the combined business model.

As of August 2024, Truist Financial is leading the way in the purchases, as their net holdings increased by 0.4%. This may not seem like much on a percentage basis, but it does bring the group’s net investment up to $582 million today, which is a significant stake.