The financial sector has regained its momentum in 2021 so far after a disappointing performance in 2020. The sector has benefited from several positive developments this year. The latest two are the likelihood of a massive $ 1.9 trillion stimulus arriving and a resurgence in sovereign bond yields.
Wall Street has maintained its trip north since the start of the year after an astonishing 2020. The nationwide rollout of COVID-19 vaccines, a significant reduction in new coronavirus cases and expectations of a new round of big fiscal stimulus have boosted market participants’ confidence in risky assets like stocks. As a result, funds were reallocated to equity markets from safe haven government bonds, resulting in a dramatic increase in long-term bond yields.
The financial sector will benefit from higher returns
On March 8, the yield on 10-year US Treasuries rose 4.3 basis points to 1.594%, marking its highest close since February 13, 2020. The yield on 30-year US Treasuries increased rose 2 basis points to 2.306%, its second-highest level of 2021. On February 25, the return of the 10-year benchmark jumped to 1.614%, its highest since February 14, 2020. Notably, the yield hovered around 0.9% at the end of 2020.
Higher risk-free returns are detrimental to high growth industries like technology, as most of these companies depend on easy borrowing at cheap rates. However, a rise in interest rates will increase the cost of funds, allowing the financial sector, such as investment and retail banks, insurance companies and loan providers to widen the gap between longer-term assets, such as loans, with term loans, thereby increasing the industry’s profit margin.
As a result, the Financial Select Sector SPDR (XLF), one of the 11 major sectors of the benchmark S&P 500 which lost 1.7% in 2020 impacted by the coronavirus, has jumped 15.8% since the beginning of the year. With the exception of energy, financials is the only sector that has posted double-digit returns so far in 2021. Meanwhile, the SPDR S&P Regional Banking ETF (KRE) climbed 32.9% since the beginning of the year.
Other short-term drivers
First, the US government has ramped up COVID-19 vaccinations. The acceleration of the vaccination process implies chances of the US economy reopening faster than expected. This will benefit cyclical sectors like Financials, Industrials, Materials, Energy and Consumer Discretionary. Reopening the economy with the mitigation of the pandemic will dramatically increase business activity and loan needs.
Second, President Joe Biden will likely sign the revised $ 1.9 trillion coronavirus aid package into a bill by March 14. The revised plan will include direct payments of $ 1,400 and additional unemployment benefits of $ 300 per week until September 6. This stimulus is expected to stimulate consumer spending, which means higher demand for businesses. This will encourage companies to increase their investment spending and therefore lead to an increasing demand for credits and loans from financial companies.
Third, a large part of the business of most regional banks is to issue loans to small businesses. Biden’s proposal includes $ 15 billion in small business grants, as well as $ 35 billion in low-interest loans. The $ 284 billion small business paycheck protection program in loans will also continue. This will force small businesses into the credit market to expand the scale of operations and renovations.
Our top picks
At this point, it will be prudent to invest in financial stocks with a favorable Zacks ranking that have strong growth potential for 2021 and which have seen strong revisions to earnings estimates in the past 7-30 days. We restricted our research to five financial behemoths (market capital> $ 50 billion) because these companies have a strong capital base and an established business model. These stocks have exploded by more than 15% since the start of the year.
Additionally, all of these stocks have strong long-term growth prospects (3-5) and pay dividends on a regular basis, providing a large stream of income in the event of a market downturn. Finally, each of our choices carries either a Zacks Rank # 1 (Strong Buy) or 2 (Buy). You can see The full list of today’s Zacks # 1 Rank stocks here.
The graph below shows the price performance of our five picks since the start of the year.
The Goldman Sachs Group Inc. GS has an expected earnings growth rate of 18.9% for the current year. Zacks Rank # 2 has a long-term growth rate of 19.2%. Zacks’ consensus estimate for the current year has improved 2.5% over the past 7 days. It has a current dividend yield of 1.53% and the share price has jumped 26.8% since the start of the year.
Bank of America Corp. BAC has an expected profit growth rate of 32.6% for the current year. Zacks Rank # 2 has a long term growth rate of 7%. Zacks’ consensus estimate for the current year has improved 0.8% over the past 7 days. It has a current dividend yield of 1.95% and the stock price has climbed 22.5% since the start of the year.
Capital One Financial Corp. COF has an expected profit growth rate of over 100% for the current year. Zacks Rank # 1 has a long term growth rate of 14.7%. Zacks’ consensus estimate for the current year has improved 0.4% over the past 7 days. It has a current dividend yield of 1.25% and the stock price has climbed 30.2% since the start of the year.
The Charles Schwab company. SCHW has an expected profit growth rate of 17.1% for the current year. Zacks Rank # 2 has a long-term growth rate of 11.3%. Zacks’ consensus estimate for the current year has improved 6.3% over the past 30 days. It has a current dividend yield of 1.11% and the share price has risen 21.6% since the start of the year.
Morgan stanley MS has an expected earnings growth rate of 11.1% for next year. Zacks Rank # 2 has a long term growth rate of 10%. Zacks’ consensus estimate for the current year and next year has improved 1.6% and 1%, respectively, over the past 30 days. It has a current dividend yield of 1.73% and the share price has appreciated 18.4% since the start of the year.
These actions are on the verge of overtaking the pandemic
The COVID-19 outbreak has dramatically altered consumer behavior, and a handful of tech companies have stepped up to make America work. At present, investors in these companies have a chance to make serious profits. For example, Zoom jumped 108.5% in less than 4 months as most other stocks sagged.
Our research shows that 5 cutting edge stocks could skyrocket due to the exponential increase in demand for ‘stay at home’ technologies. This could be one of the biggest buying opportunities of this decade, especially for those entering early.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.