Amid a spate of first-quarter earnings report, the financial services sector, the second-largest sector weight in the S&P 500, is not doing much to earn investors’ confidence. Over the past week, the Financial Select Sector SPDR (NYSEArca: XLF), the largest exchange traded fund tracking the financial services sector, is lower by nearly 1%.
According to FactSet, S&P 500 financial companies are projected to experience a 20% jump in earnings growth for the quarter year-over-year, compared to the broader index’s 17% gain.
Earlier this year, financials were also propped up by a rise in bond yields as higher interest rates typically widen the margin spread between bank loans and deposits. The spreads will further widen as the Federal Reserve has stated its intentions to raise interest rates in response to economic growth and rising inflation. Still, earnings season has not been the catalyst some expected for the sector.
“Investors have given some blame to the rise in credit card delinquency rates, the fall in loan demand, as well as the ever-flattening yield curve. Remember, the spread between the 2- and 10-year Treasury yields just hit a fresh 11-year low, to less than 45 basis points (less than half of 1 percent),” said Miller Tabak Equity Strategist Matt Maley in a post on CNBC.com.
Dealing With Bank Disappointment
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. The rising interest rate environment is also good for net interest margins for banks and more so for insurance companies.