Lloyds (LSE: LLOY) shares have been on an absolute tear because the yr started, climbing 25% since 1 January. Which means an funding of £10,000 on New Yr’s Day would have introduced in £2,500 in revenue.

That’s an honest chunk of passive earnings for simply over two months of funding. The identical amount of cash in a Lloyds financial savings account would have accrued solely £57.50 in curiosity.

So what’s driving this rally and, extra importantly, will it proceed?

Financial stability

A number of elements could have contributed to Lloyds’ spectacular run this yr. Most notably, its current monetary efficiency has been robust, with £4.9bn in revenue recorded in H1 2024. The expansion has been attributed to excessive rates of interest pushing up the financial institution’s internet curiosity margins.

The UK housing market’s doing effectively, serving to to develop the financial institution’s mortgage e-book because it focuses on mortgage lending. Value-cutting measures are additionally a contributing issue that helped enhance effectivity.

Within the meantime, UK financial circumstances have been comparatively steady regardless of a tangible air of stress in world markets. Client spending has held up higher than anticipated and fears of a deep recession have eased. This has led to a constructive re-rating of UK banks, with Lloyds main the cost.

May US commerce tariffs derail the momentum?

Proper now, the principle subject on everybody’s lips is US commerce tariffs. There are considerations that US commerce insurance policies might disrupt world monetary markets. The Trump administration’s lately launched tariffs on international imports have ignited a wave of uncertainty and market volatility.

If these tariffs result in a broader commerce warfare, world financial development might sluggish, probably lowering demand for company lending and impacting UK banks.

Whereas Lloyds has little direct publicity to worldwide commerce, its fortunes are tied to the broader UK financial system. A worldwide slowdown might weaken enterprise confidence, impacting mortgage development and profitability.

Moreover, if inflation picks up resulting from increased import prices, the Financial institution of England could also be pressured to maintain rates of interest increased for longer. This could put additional strain on debtors, probably resulting in an increase in mortgage defaults.

International financial dangers

One other main issue influencing banks is the financial downturn in China. The world’s second-largest financial system has struggled with weak client demand, a property sector disaster, and declining industrial output.

This has already impacted European banks with important Chinese language publicity, reminiscent of HSBC and Customary Chartered. Up to now, this doesn’t seem to have bled into Lloyds however any world instability might affect the financial institution’s backside line.

If China’s slowdown results in a broader decline in world commerce and funding, UK banks might see decrease demand for financing and elevated market volatility.

Nonetheless the perfect of the remainder

Lloyds has outperformed all different main UK banks up to now this yr, together with Barclays, HSBC and NatWest.

After considered one of its greatest years on file in 2024, Barclays has began the yr slowly. With extra diversified world operations, it’s confronted difficulties in funding banking. In the meantime, NatWest has struggled with management points and HSBC is extra uncovered to the worldwide financial system, which has weighed on its efficiency.

So with its localised focus, Lloyds has sidestepped many current points, making it a beautiful inventory to contemplate as a attainable secure haven in these tumultuous occasions.