The financial sector valuations still look relatively cheap, compared to the broader market. The sector’s valuations are still about 25% below the average since the early 1990s.
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.
The SPDR S&P Regional Banking ETF (NYSEArca: KRE), the largest regional bank ETF, has been stymied this year by the surprisingly dovish Fed.
“Banks as a group seem to be close to attractive buying areas, but not quite there yet. We can rationalize that the current weakness is due to dysfunction in Washington threatening the reasons why the markets rallied after the election,” according to Barron’s.
For more information on the financial sector, visit our financial category.