The Financial Select Sector SPDR (NYSEArca: XLF) and other financial services exchange traded funds are being challenged by what investors perceive as a surprisingly dovish Federal Reserve and other factors. Among those other are factors is the first-quarter earnings, which kicks off in earnest for the financial sector next week.
Some analysts and traders argue that investors should be careful in making bullish bets on the financial services space, the S&P 500’s second-largest sector allocation, leading up to earnings season. In fact, analysts currently are not all that enthusiastic regarding bank stocks.
“One standout sentiment analysis factor for bank stocks has been the steep decline in the number of “buy” ratings among analysts,” according to Schaeffer’s Investment Research. “For example, the percentage of “buy” recommendations for stocks that fall under our “Banks” umbrella currently sits at just 36% — tied for the lowest among all of the 36 sectors we track. This is a sharp decline from 54% “buy” ratings at this time last year.”
Some bank stocks are more beloved than others as highlighted by some recent analyst chatter.
KBW has mixed views on first-quarter results for some of XLF’s biggest holdings. The research firm is “raising first-quarter earnings estimates for Bank of New York Mellon (BK), State Street (STT), and Wells Fargo (WFC). He is lowering estimates for Bank of America (BAC), Citigroup (C), Goldman Sachs (GS), JPMorgan Chase (JPM) and Morgan Stanley (MS),” according to part of a KBW note posted by Crystal Kim of Barron’s.
However, some traders and investors are expressing concerns that the Trump trade is overbought, which makes the equities market vulnerable to quick turns.
Some are worried that House Republicans may not garner the necessary votes to replace the Affordable Care Act, or Obamacare, further fueling concerns over Trump’s ability to pass his planned tax cuts and deregulation initiatives, which have been supporting the recent bounce in the financial sector.
“If analyst sentiment on bank stocks, as measured by “buy” ratings, is once again in the process of moving higher from this extreme low, it stands to reason that future upgrades could be a positive catalyst for the group,” according to Schaeffer’s.
Some strategists also argue that the financial sector may be a good area to look at this time around, given the potential for growth in a rising rate environment, along with potential tax and regulatory changes under the Donald Trump administration.
For more information on the financial sector, visit our financial category.