First-quarter earnings reports out of the financial services sector have been strong, but investors have not been impressed. Just look at the the Financial Select Sector SPDR (NYSEArca: XLF). XLF, the largest exchange traded fund tracking the financial services sector, has been besieged by outflows in recent days.
“The largest ETF tracking the banking industry, State Street Corp.’s Financial Select Sector SPDR Fund, known by its ticker XLF, had $460 million yanked from its coffers Wednesday. It was the fund’s largest single-day loss since January, and it follows two days of outflows while the six largest U.S. banks posted strong results,” reports Bloomberg.
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.
Related: Are Banks Fundamentals Still Strong?
Good News Baked In For Banks
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.
“Through Wednesday, JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley had all reported earnings. Combined, the firms generated more than $30 billion in income for the first time ever. In addition, revenue from trading notched the highest mark in three years as volatility returned to markets,” according to Bloomberg.
Related: U.S. Sector ETFs for a Rising Rate Environment
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.
“To some investors, the recent weakness in bank stocks despite the stellar earnings presents an opportunity,” notes Bloomberg.
For more information on the financial sector, visit our financial category.