Wall Street is firing on all cylinder after a minor fluctuation in the last week of January due to the short squeeze trading strategy adopted by a particular group of retail investors. All the three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — posted all-time highs on Feb 8. Year to date, the Dow, the S&P 500 and the Nasdaq Composite are up 2.6%, 4.3% and 8.5%, respectively.
Meanwhile, the bank stocks have performed exceptionally well so far this year. SPDR S&P Regional Banking ETF (KRE) has rallied 15.9% year to date while the Financial Select Sector SPDR (XLF), one of the 11 broad sectors of the benchmark S&P 500 Index has gained just 6.2%. Numerous positive factors are likely to drive bank stocks going forward. Let's discuss briefly.
First, the U.S. government has ramped up nationwide COVID-19 vaccine deployment. Notably, the Biden administration has targeted administering at least 100 million doses of vaccine during its first 100 days in office. Reopening of the economy with the easing of the pandemic will significantly ramp up business activities and loan requirements.
Second, Congressional Democrats have moved forward to initiate voting in both the Senate and the House of Representatives without Republican support through a process called budget reconciliation in order to make President Joe Biden's proposed $1.9 trillion coronavirus-aid package a law. This large fiscal stimulus will speed up the recovery of the U.S. economy.
Third, a major part of businesses of most of the regional banks consists of issuing mortgages and small business loans. Biden's proposal includes $15 billion in grants to small businesses, along with $35 billion in low-interest loans. The Small Business Paycheck Protection Program of $284 billion in loans will continue.
Moreover, the Fed is likely to keep benchmark interest rate at 0-0.25% for a long period. Low interest rate forced the mortgage rates to decline significantly resulting in a boom in the U.S. housing market.
Fourth, nationwide vaccine deployment and expectations of speedy recovery of the U.S. economy have strengthened investors' confidence in risky assets like equities. The gradual shift of funds from bond to equities resulted in low bond prices and higher yields. The yield on the benchmark U.S. 10-Year Treasury Note is currently hovering around 1.2%.
A hike in interest rate will raise the cost of funds, which in turn will enable the financial sector, especially banks, to widen the spread between longer-term assets, such as loans, with shorter-term liabilities, thus boosting the sector’s profits margin.
Fifth, strong pent-up demand is likely to drive the U.S. economy in 2021. Personal savings rate was high in 2020 due to concerns over coronavirus-led economic uncertainties. Consumers were restrained or restricted by the government to spend on those items that were closed during lockdowns. Reopening of the economy will significantly boost personal spending. Consequently, stocks of cyclical sectors like financials will benefit.
Our Top Picks
At this stage, it will be prudent to invest in bank stocks with a favorable Zacks Rank that have strong growth potential for 2021 and have witnessed solid earnings estimate revisions in the last 7 to 30 days. We have narrowed down our search to six such stocks that have popped year to date. Each of our picks carries a Zacks Rank #1 (Strong Buy). You can see
. the complete list of today’s Zacks #1 Rank stocks here
The chart below shows the price performance of our six picks year to date.
The Goldman Sachs Group Inc.'s ( GS Quick Quote GS - Free Report) key source of earnings stability is its business diversification. Within traditional banking, a diversified product portfolio has better chances of sustaining growth than many other banks, which have exited some of these areas. It operates in four segments: Investment Banking, Global Markets, Asset Management, and Consumer & Wealth Management.
The company has an expected earnings growth rate of 15.8% for the current year. The Zacks Consensus Estimate for the current year has improved 0.3% over the last 7 days. The stock price has climbed 13.8% year to date.
East West Bancorp Inc. ( EWBC Quick Quote EWBC - Free Report) provides a range of personal and commercial banking services to businesses and individuals in the United States and Greater China. It operates through three segments: Consumer and Business Banking, Commercial Banking, and Other.
The company has an expected earnings growth rate of 18.1% for the current year. The Zacks Consensus Estimate for the current year has improved 7.1% over the last 7 days. The stock price has soared 29.9% year to date.
Synovus Financial Corp. ( SNV Quick Quote SNV - Free Report) provides various financial products and services. It operates through three segments: Community Banking, Wholesale Banking, and Financial Management Services.
The company has an expected earnings growth rate of 48.1% for the current year. The Zacks Consensus Estimate for the current year has improved 2% over the last 7 days. The stock price has rallied 26.6% year to date.
KeyCorp. ( KEY Quick Quote KEY - Free Report) provides various retail and commercial banking services in the United States. It operates in two segments, Consumer Bank and Commercial Bank. The company has an expected earnings growth rate of 43.7% for the current year. The Zacks Consensus Estimate for the current year has improved 21.5% over the last 30 days. The stock price has jumped 15.3% year to date. Comerica Inc. ( CMA Quick Quote CMA - Free Report) provides various financial products and services. It operates through three segments: Business Bank, Retail Bank, and Wealth Management. The company has an expected earnings growth rate of 58.4% for the current year. The Zacks Consensus Estimate for the current year has improved 0.4% over the last 7 days. The stock price has surged 13.1% year to date. Popular Inc. ( BPOP Quick Quote BPOP - Free Report) provides various retail, mortgage, and commercial banking products and services in the United States and Puerto Rico. The company has an expected earnings growth rate of 14.1% for the current year. The Zacks Consensus Estimate for the current year has improved 10% over the last 30 days. The stock price has advanced 10.7% year to date. More Stock News: This Is Bigger than the iPhone!
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