In an improving economic environment with potentially favorable policy changes ahead, investors may consider an overweight position in financial sector stocks, notably banks and related exchange traded funds.
“We like U.S. banks because of sustained economic growth, normalizing monetary policy and prospects for deregulation and increased payouts,” according to BlackRock strategists.
As conditions improve, the Federal Reserve will tighten its monetary policy to obviate an overheating economy. The central bank has already outlined plans to start winding down its trillion dollar balance sheet in October and left a December rate hike open.
Investors should anticipate a tighter policy as a key inflation gauge this week could confirm U.S. inflation is moving toward the Fed’s 2% target.
“We think investors are still underestimating the potential for rates to move up and the yield curve to steepen, both critical to banks’ profitability,” according to BlackRock.
The annual stress test has also paved the way for the biggest U.S. banks, increasing investors’ outlook for more stock buybacks and dividend payouts.
Deregulation could also help the financial sector improve their margins. President Donald Trump’s administration has shown its eagerness in cutting back the red tape and remove some of the post-financial crisis regulations that has stifled the industry.