It is one of this year’s top-performing sectors. Add to that, it has been one of the most reliable growers of earnings in otherwise mediocre year for S&P 500 profit growth and over the past several years, it has been one of the leading sources of dividend growth in the benchmark U.S. index.
Still, the financial services sector may not be getting the respect it deserves. Regarding the market’s outlook for next year’s financial services sector earnings growth, Josh Brown at The Reformed Broker says market participants are “giving the financials virtually no benefit of the doubt on their forward earnings multiple for the year ahead.”
“The banks are expected to be growing their earnings by 11.5% in 2014 according to the consensus, that’s faster than the S&P 500′s expected earnings growth rate of 10.8% and a better pace than what’s expected for five other sectors (Industrials, tech, Staples, Healthcare and Utilities),” writes Brown.
Noteworthy is the fact that the Financial Select SPDR (NYSEArca: XLF), the largest U.S. sector ETF, is still nowhere close to its pre-crisis highs and the same can be said of scores of other bank ETFs. However, the 12-month forward P/E of 12.7 on the financial services sector is the lowest among the 10 S&P 500 sectors. [10 ETFs Still Nowhere Near Pre-Crisis Highs]
That is barely above the sector’s 10-year average of 11.9 and the only other sector is even close to be valued in a “no respect” fashion similar to financials is energy, according to FactSet data.
As was noted earlier this year, it is not cheap to play defense. At least not cheap relative to embracing financials. With 12-month forward P/E ratios of 17.4 and 15, respectively, stodgy staples and utilities names are pricey compared to bank stocks and their own 10-year averages, confirming investors will pay up for the sleep-at-night comfort of ETFs like the Consumer Staples Select Sector SPDR (NYSEArca: XLP) and the Vanguard Utilities ETF (NYSEArca: VPU). [Playing Defense Isn’t Cheap]