A Rare, Preemptive Round of Bank Downgrades
The banks dominated the morning's news flow following a notable set of analyst downgrades. The downgrades came as part of a broader bank preview issued by Oppenheimer, and what makes the move unusual is its timing — it arrived in advance, ahead of the events that would normally prompt such a call. The downgrades hit the sector across the board.
Crucially, these downgrades are not a statement that the companies are poorly positioned. The analysts continue to view the banks as well positioned operationally. Instead, the entire rationale is a valuation concern, tied to where the firm believes the big banks currently sit within the cyclical nature of the sector — specifically, deep into a cycle rather than at its start.
Estimates Up, Valuations Still Not Compelling
A key nuance is that even while downgrading the stocks, Oppenheimer actually raised its second-quarter estimates for these banks. This upward revision was driven by a strong outlook, particularly for trading activity. Looking further out, the firm noted that its 2027 estimates rise the most for Goldman Sachs and Morgan Stanley, precisely because those two are the purest plays on trading and investment banking.
Despite raising those numbers, the firm concluded that the valuations are still not what it would call "compelling." In other words, even with better earnings expectations baked in, the prices have run too far. On the day, Morgan Stanley traded lower while Goldman Sachs was up slightly. Both were downgraded to underperform from perform. Citigroup and Bank of America were also downgraded, moving to perform from outperform.
The "Take the Money and Run" Thesis
Oppenheimer was explicit that it sees nothing in the immediate future to knock investment banks off their growth or returns trajectory. The problem is purely one of timing within the cycle: the firm believes the banks have moved into the later part of an expansionary cycle.
The reasoning was captured directly in the firm's own words: while the cycle may go on for another 12 to 18 months or more, they would rather not wait around for the warning signs to appear. As a result — and particularly in the case of investment banks — they are more inclined to "take the money and run." This is a deliberate choice to exit early rather than try to squeeze out the final stretch of an aging expansion and risk being caught when conditions deteriorate.
What to Do With the Proceeds
The analysts did not simply tell investors to reduce exposure to the big banks; they laid out where that freed-up capital should go.
Boring, stable commercial banks. First, they recommended rotating into the most boring and stable commercial banks available, identifying U.S. Bancorp and PNC Financial as opportunities. The logic is that these two are believed to be in the relatively early phase of the expansion cycle — the opposite of the late-cycle investment banks being trimmed.
Alternative asset managers. Second, they recommended redeploying the funds raised from selling the big banks into alternative asset managers, naming three specifically: Ares Management, Blackstone, and KKR. These names had been caught up in a sharp sell-off driven by concerns about private credit exposure — a sell-off that many analysts view as overdone. That perceived overreaction is precisely why the firm sees them as an attractive place to deploy capital.
The overarching message is therefore not that the near-term outlook for the banks is bad. It is that the firm is unwilling to wait around for the picture to start looking worse. As the saying goes in this space, "boring is beautiful" — a sentiment that fits the rotation toward stable commercial banks neatly.
A Closer Look at Citigroup
Citigroup stands out within this group as the best-performing stock of the big four over the past year or so. It has risen roughly 70% over the past 12 months, compared with gains of only about 50% for Goldman Sachs and Morgan Stanley over the same span — making it a clear outperformer.
That outperformance, however, has stretched its valuation. Price-to-sales now sits at about 1.4 times, the highest level seen in a very long time, and its price-to-earnings ratio is approaching 18 times again. This reinforces the analysts' framing: the case against the stock is not about earnings or any deterioration in the underlying business, but simply that the valuation may have gotten "out over the skis." The stock is showing a bit of fatigue after such a large run, and that fatigue may well continue for a while.
How to Approach Citigroup: An Example Options Trade
Given a stock that has run hard and is now showing flatness and signs of fatigue, the suggested approach is an at-the-money put diagonal. The structure is designed to take advantage of either a slight pullback or even a simple flattening-out in the shares — it does not require a large decline to work.
A key scheduling detail shapes the trade: Citigroup earnings are due July 14th. The trade is constructed around that date as follows:
- Sell the traditional July 17th 139 puts
- Buy the August 140 puts
- Net cost: roughly $275 (about 2.75) for the spread
This diagonal structure provides a favorable term stretch of volatility — selling the nearer-dated July option against the longer-dated August option. The trade is positioned to benefit from the very scenario the analysts describe: stocks that have had a big run, are beginning to show fatigue, and may continue to drift or stall for a while. A slight pullback or continued flattening in Citigroup would work in the trade's favor.
Questions Asked and Answered
How would an analyst approach an example trade for Citigroup?
By using an at-the-money put diagonal that takes advantage of the stock's current flatness — selling the July 17th 139 puts and buying the August 140 puts for about $275 — timed around the July 14th earnings date, looking to profit from a slight pullback or a flattening out in the stock after its large run-up.
The Bottom Line
The thread tying everything together is valuation and cycle timing, not fundamentals. The banks are still considered well positioned, estimates are even rising, and the cycle could run another 12 to 18 months or more. But rather than wait for warning signs, the recommended playbook is to trim late-cycle big banks, rotate proceeds into early-cycle commercial banks (U.S. Bancorp, PNC) and beaten-down alternative asset managers (Ares, Blackstone, KKR), and — in the specific case of an extended name like Citigroup — express a cautious, mildly bearish-to-neutral view through a defined options structure rather than an outright sale.
