The SPDR S&P Bank ETF (NYSEArca: KBE) and SPDR S&P Regional Banking ETF (NYSEArca: KRE), among other exchange traded funds dedicated to bank stocks, have been soaring since early November, but the financial services sector still has upside.
At least that is the view of some analysts tracking the sector, which is the second-largest in the S&P 500.
KBE, KRE and friends are benefiting from speculation that the Federal Reserve will finally raise interest rates at the conclusion of its last meeting of 2016 this week. With a steepening yield curve or wider spread between short- and long-term Treasuries, banks could experience improved net interest margins or improved profitability as the firms borrow short and lend long.
Some market observers see the second-largest sector allocation in the S&P 500 as being a valid bullish play for the last three months of the year. Good news: Analysts see more good things on the horizon for banks stocks in 2017.
“Oppenheimer’s Chris Kotowski and team of analysts see continued upside for the banks in 2017. Despite the banks looking more fully valued, Oppenheimer’s view is that 2017 to 2018 could be Goldilocks years for those banks,” reports Jon Ogg for 24/7 Wall Street.
There is another important catalyst to consider for financial services stocks and ETFs: The potential for bullish earnings trends to emerge.
Higher interest rates would help widen the difference between what banks charge on loans and pay on deposits, which would boost earnings for the financial sector. Regional banks are among the stocks most positively correlated to rising interest rates because higher rates improve net interest margins.
Related: Financial Sector ETFs Maintain Momentum
In the Jefferies note “three major banks saw their targets raised handily along with reiterating their Outperform ratings. Other targets were raised or ratings were given bumps as well. The firm said that its favorite names remain BofA, Citi, CIT and Goldman Sachs,” according to 24/7 Wall Street.
Those stocks are components in the Financial Select Sector SPDR (NYSEArca: XLF), the largest financial services ETF. Jefferies also raised “earnings estimates for 2016, 2017 and 2018 were raised for JPMorgan Chase, Morgan Stanley and Wells Fargo,” reports 24/7 Wall Street.
Those are also major holding in XLF.
Politics are also boosting bank stocks. President-elect Donald Trump’s official transition website stated that the “financial Services Policy Implementation team will be working to dismantle the Dodd-Frank Act,” which was signed into law by President Barack Obama in 2010 to obviate another financial downturn. The law increased the burden of banks to safe guard against another meltdown event and forced many to greatly reduce exposure to riskier assets, which have also dragged on the financial sector’s bottom line.
For more information on the banking sector, visit our financial category.