As benchmark rates move higher, the outlook for the banking stocks and sector-related exchange traded funds looks more promising.
The SPDR S&P Bank ETF (NYSEArca: KBE) climbed 6.0% over the past three months and touched a 13-month high this week.
The strong earnings season has helped lift the sector. For instance, the 24 companies in the KBW Bank Index posted profit growth of 8.8% and beat estimates by almost 10%, reports Michael P Regan for Bloomberg.
Moreover, some argue that the recent spike in interest rates on long-term Treasuries will support the financial sector’s momentum ahead. Yields on 30-year Treasury notes were up to 2.986% Wednesday and recently broke above its 200-day simple moving average. [Inflationary Concerns Send Treasury ETFs Below Long-Term Support]
The higher long-term rates help the sector since many banks borrow at short-term rates and lend at long-term rates, capitalizing on a widening spread.
“We continue to see signs of sector rotation playing out under the surface,” Strategas Research Partners analyst Chris Verrone said. “In particular, financials continue to improve in our work with roughly 85 percent of the sector outperforming over the last 65 days.”
Strategas has an optimistic outlook, pointing to the steepening yield curve and higher highs in industry bellwethers, such as JPMorgan (NYSE: JPM) which hit a 15-year high on Monday. JPM makes up 1.7% of KBE’s portfolio.
Cornerstone Macro analyst Carter Worth also argues that the financial sector could help push the U.S. market to new highs as the charts are forming a bullish pattern. Specifically, Worth pointed to a wedge pattern in the S&P 500 financial sector. The Financial Select Sector SPDR (NYSEArca: XLF) has formed a wedge, or arrow-like, formation since the start of the year. Chart watchers are waiting for a breakout below or above the two predominant upper and lower bound lines. [Why You Might Want to Look at Bank ETFs Right Now]
SPDR S&P Bank ETF
For more information on bank sector, visit our financial category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.