The stock market was having a strong day on Wednesday, with the S&P 500 (^GSPC 1.40%) and Nasdaq Composite (^IXIC 1.90%) higher by 1.6% and 1.9% as of 10 a.m. ET. But the big bank stocks are leading the way, with several major U.S. financial institutions spiking higher. In fact, Wells Fargo (WFC 6.11%), Goldman Sachs (GS 4.91%), and Citigroup (C 6.49%) were all higher by 5% or more for the day.

There are two main reasons why these bank stocks are soaring. 

Bank earnings are far better than expected

First, bank stocks kicked off fourth-quarter 2024's earnings season on Wednesday, and the reports look impressive across the board, especially when it comes to these three companies.

Wells Fargo actually missed revenue expectations for the quarter, but handily surpassed expectations on the bottom line. And perhaps the biggest surprise from the consumer-focused bank is that it expects net interest income in 2025 to be higher than it was in 2024. Although Wells Fargo makes most of its money from consumer banking, investment banking is becoming more of a growth catalyst, with investment banking fees up 59% year over year in the quarter.

Goldman Sachs beat analyst estimates on both the top and bottom lines, with net income nearly doubling from the same quarter in 2023. Goldman's trading revenue was a positive surprise on both the equities and fixed-income sides of the business, while investment banking revenue came in as expected. Asset and wealth management was a strong point, with revenue jumping by 8%, while analysts had expected a slight decline.

Last but not least, Citigroup not only surpassed expectations on the top and bottom lines and announced a new $20 billion stock buyback. This represents about 14% of the bank's market cap. Citi's business results looked strong on both the consumer and investment banking sides of the company. Just to name a few highlights from the latter, investment banking revenue increased 35% year over year, and trading revenue soared by 36%.

Tame inflation data could be a catalyst for 2025

The second catalyst for bank stocks' rise was improved inflation. In recent years, the net interest margins of big banks have been under pressure due to rising interest rates. In simple terms, the cost of deposits and other types of capital has risen faster than the yields banks are receiving from their loan portfolios.

Well, this week, investors got not one, but two better-than-expected inflation reports. On Tuesday, the Producer Price Index (PPI) came in significantly lighter than economists had forecast. Wednesday, core Consumer Price Index (CPI) data for December came in at 3.2% year over year, versus the 3.3% expected.

The significance is that a lower-than-expected inflation rate could cause the Federal Reserve to lower interest rates significantly more aggressively than investors are expecting, and this could be a positive catalyst for bank profits in 2025 and beyond.