The Financial Select Sector SPDR (NYSEArca: XLF) has been under the microscope in recent weeks as the financial services sector, the second-largest sector weight in the S&P 500, kicked off fourth-quarter earnings season.
It appears some market observers are still waiting to be impressed by the sector’s earnings reports. The financial sector strengthened after the three banks revealed strong quarterly profits and expressed optimism for the year ahead in the ir first public comments over earnings, reports Tanya Agrawal for Reuters.
According to Thomson Reuters, the combined profit of S&P 500 companies is projected to have returned 6.2% in the fourth quarter, largely due to improving results out of the financial sector.
Financials have also been among the best performers since the elections, with the KBW Bank Index up 23% since November 8, as traders speculated that higher U.S. interest rates and potential rollback of financial downturn-era regulations would bolster the sector.
“”Bank earnings improved in the quarter from higher trading activity, improved net interest margins, expense control and lower credit costs, however loan growth remains weak, which may impede material near-term earnings improvement,” said Julie Solar, Senior Director, Fitch Ratings, in a recent note.
XLF is coming off one of its best annual performances since the global financial crisis. While the financial services sector, the second-largest sector allocation in the S&P 500, has some doubters after last year’s impressive rally, some market observers believe the sector can keep tracking higher this year.
In addition to XLF, the largest financial services ETF, 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.
Bank ETFs are benefiting from speculation that the Federal Reserve will boost interest rates multiple times this year. 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.
“Increased trading activity following the U.S. election helped to drive capital markets growth for the five large global trading and universal banks, including Bank of America Corporation, Citi, Goldman Sachs, JP Morgan, and Morgan Stanley. Results increased 20% in aggregate from 4Q15, with most of the improvement in FICC, up 48% from the prior year. Debt underwriting was also a highlight due to more leveraged finance issuances,” said Fitch.
For more information on the banking sector, visit our financial category.