The Case for Financials: Macro-Driven Resurgence

Key points:

  • The financial sector has gained over 7% from June lows. It has swung back to life after lagging the broad market at times this year and is now up 2.1% year-to-date.1
  • The macroeconomic backdrop is supportive of corporate earnings, major banks are delivering their highest returns on equity in a decade, and deregulation should benefit regional banks.
  • Risks include further yield curve flattening and any repercussions of rising protectionism.
  • Attractive valuations and exchange traded product outflows suggest that the sector may be overlooked.


This year we have favored financial stocks on the basis of earnings momentum, deregulation, a steepening yield curve and the value factor. So far, two out of four have aligned with expectations: The sector has posted over 20% year-on-year earnings growth and regulations were cut. Yet the yield curve flattened, and value didn’t outperform.2 Within the sector, financial services firms are outperforming by 1.4%, followed by regional banks at 1.2% above the broad sector. Broker-dealers and exchanges are only slightly ahead at 0.4%, while insurers are languishing and underperforming by over 4% (see Chart 1).

Chart 1: Financial subsectors versus sector performance (1/1/18-8/31/18)

Chart 1: 2018 performance difference: financial subsectors vs. sector

Index performance is for illustrative purposes only. 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. Sources: BlackRock, Bloomberg, August 31 2018. Performance depicted is that of the Dow Jones U.S. Financial Services Index, Dow Jones U.S. Select Regional Banks Index, Dow Jones U.S. Select Investment Services Index, Dow Jones U.S. Select Insurance Index, relative to the Dow Jones U.S. Financials Index, year to date.

A positive backdrop

We consider that three key drivers currently provide support for the financial sector:

1. A bustling macro environment

The U.S. economy is enjoying above-trend growth, stoking solid business and consumer spending. The Federal Reserve’s steady policy normalization has only slightly tightened financial conditions in the domestic economy and interest rates remain supportive of risk appetite. Banks have also benefited directly from the government’s fiscal policies: The 2017 tax cut alone gave them a $6.4 billion windfall in second quarter 2018 earnings.3