The Financial Select Sector SPDR (NYSEArca: XLF), the largest exchange traded fund tracking the financial services sector, and rival financial services ETFs have been solid performers dating back to last year. For example, XLF is up 18% over the past 12 months.
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.
However, some market observers believe banks stocks may need a short-term breather before climbing higher.
“Many of the names we cover have had total returns for shareholders of 20% all the way up to 70% over the last two years,” said Morningstar. “For an industry which has traditionally grown tangible book value in the mid- to upper-single-digit-range, with range-bound margins and returns on equity, this does not seem sustainable to us.”
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.