“Expectations for a flatter yield curve in 2019 will continue to weigh heavily on investor sentiment for financials,” according to State Street. “However, the Fed has signaled a slowing of interest rate increases in 2019. In fact, 2-year Treasury rates have already fallen from a high of 2.97% in November to 2.54% more recently. The yield curve may not flatten as much as investors are expecting. Maybe it will even steepen some this year and unexpectedly boost financials’ profitability.”
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Additionally, the sector’s valuations are significantly depressed following last year’s slide. While valuations for financials are low, earnings growth remains solid.
“Trading at an eye-popping 55% discount relative to the broader market based on price-to-earnings multiples, it potentially offers compelling value to investors willing to accept the risk of investing in the sector,” according to State Street. “According to FactSet, fourth quarter earnings per share (EPS) growth for financials will be more than 10%, roughly in line with the market EPS growth rate.”
For more information on the financials sector, visit our financial category.