Are Banks Fundamentals Still Strong?

The Financial Select Sector SPDR (NYSEArca: XLF), the largest exchange traded fund tracking the financial services sector, and rival financial services ETFs have recently faltered, but some analysts believe the fundamental case for bank stocks remains sound.

Capital levels at major U.S. banks are viewed as solid. Additionally, the Trump Administration’s tax reform effort is seen as a potential catalyst for the financial services sector, but it remains to be seen if that effort will come to life. Some industry observers expect the tax reform would help banks boost earnings in significant fashion.

“Financials entered the year seemingly poised for outperformance: After all, the group ended 2017 on a high note, and fundamentals have been improving, thanks to higher interest rates and lower corporate taxes,” reports Teresa Rivas for Barron’s. “However, since volatility shook stocks in recent months, those stronger fundamentals haven’t protected financials, and they’ve traded roughly in line with the market.”

Related: U.S. Sector ETFs for a Rising Rate Environment

Deregulation could also help the financial sector improve their margins. President Donald Trump has shown its eagerness in cutting back the red tape and remove some of the post-financial crisis regulations that has stifled the industry.

What Analysts Are Saying About Banks

Keefe, Bruyette & Woods’ Frederick Cannon “writes that we may have already seen most of financials’ outperformance vis-a-vis tech already, as those gains came early in the cycle,” reports Barron’s.