Bank stocks have been on a bit of a roller-coaster ride this year. At times, investors have rotated into them and out of artificial intelligence (AI), although more recently, there have been concerns that AI could displace banks in various ways. Regardless, banks tend to perform better in a rising interest rate environment, particularly if the yield curve remains steep, with yields on shorter-term bonds lower than those on longer-dated bonds. That's because banks tend to borrow money at short-term rates and lend it out at longer-term interest rates. In a rising interest rate environment, net interest income (NII), the spread revenue banks make between the interest they pay on liabilities such as interest-bearing deposits and what they earn on interest-earning assets such as loans, tends to benefit.
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