The Case for Financials in 2018

U.S. financials performed strongly in 2017, but still lagged the broader market as well as technology stocks and momentum names. But with the Federal Reserve (Fed) normalizing monetary policy, higher interest rates, and prospects for deregulation, the sector now seems poised for growth. The U.S. ETF Investment Strategy team discusses the sector and investment considerations for 2018.

Why financials?

Three drivers could potentially propel financials stocks higher in 2018. Earnings momentum coupled with deregulation, yield curve steepening, and the potential support of the value factor.

1. Earnings and deregulation
Last year was a strong year for corporate profitability across all major regions and it will be a tough act to follow. However in the United States, corporate tax cuts and the prospect of deregulation presents new opportunities for growth in the financial sector. Corporate tax cuts could provide an extra leg up for earnings, while the prospect of far-reaching financial sector reforms, potentially not requiring legislation, is also encouraging for financial stocks. Although the impact of deregulation can be difficult to quantify, one study by Bloomberg Intelligence suggests that the Treasury Department’s plan to ease regulation could free up a combined $124 billion of capital to return to shareholders.1

Bank performance relative to equity market

Source: Thomson Reuters Datastream, MSCI and BlackRock Investment Institute. Jan 10, 2018. Index performance is for illustrative purposes only. Index performance represented comprises MSCI USA Banks Index relative to MSCI USA Index, MSCI European Economic and Monetary Union (EMU) Banks Index relative to the MSCI EMU Index, and MSCI Japan Banks Index relative to the MSCI Japan Index. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.