Fourth-quarter earnings season for the financial services sector kicks-off this week and there are some concerns about how those reports will impact individual bank stocks and exchange traded funds, such as the Financial Select Sector SPDR (NYSEArca: XLF).
While several marquee members of XLF’s lineup recently announced fourth-quarter charges related to tax reform, some analysts believe Wall Street will be focusing more on 2018 rather than fourth-quarter earnings.
“Who cares what happens in the fourth quarter? It’s ancient history,” Dick Bove of Vertical Group said in an interview with CNBC. “What we care about is if we get this investment banking thing going, if we get these loans happening, banks will make a lot of money in 2018.”
Amid expectations for more interest rate hikes in 2018, the financial services sector could be working its way into a period of long-term out-performance. The recent rally in the sector could still be in the early innings, according to some market observers.
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 key to industry activity this year will be investment banking, which Bove predicts will see a sharp pickup. The reason is twofold: well-known unicorns such as car-hailing service Uber could float their shares and public companies could bring more stock to market, both stemming from current enthusiasm for equities,” according to CNBC.
Bove is bullish on Goldman Sachs (NYSE:GS). Goldman is XLF’s sixth-largest holding with a weight of almost 2.6%
Some good news for XLF and friends is that the financial services sector is widely regarded as perhaps the only sector in the U.S. that is attractively valued relative to the broader market and its own long-term averages. 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.
Rivals to XLF include the Fidelity MSCI Financials Index ETF (NYSEArca: FNCL), iShares U.S. Financials ETF (NYSEArca: IYF) and Vanguard Financials ETF (NYSEArca: VFH).
For more information on the financial sector, visit our financial category.