Higher interest rates would help widen the difference between what banks charge on loans and pay on deposits, which would boost earnings for the financial sector. Regional banks are among the stocks most positively correlated to rising interest rates because higher rates improve net interest margins.
“Financials ranked as the second largest sector in SPX from 11/15/16 – 5/16/17 but then fell to the third largest sector on 5/17 before resuming their ranking as the second largest sector from 5/19-5/26,” according to the KBW note seen in Barron’s. “Thus far in 2017, SPX financials lost 0.99% of its market share within the Index.”
With a steepening yield curve or wider spread between short- and long-term Treasuries, banks could experience improved net interest margins or improved profitability as the firms borrow short and lend long. Although the Fed unveiled its first rate hike of 2017 in March, the central bank’s dovish tone punished regional bank stocks and ETFs.
Weighing on bank stocks and ETFs is speculation that the Fed may not have the leeway with which to raise rates again this year.
For more information on the financial sector, visit our financial category.