The financial sector has regained its momentum in 2021 so far after a disappointing performance in the pandemic-ridden 2020. The sector has benefited from several positive developments this year. The latest two are the likelihood of the arrival of a massive $1.9 trillion stimulus and resurging yields on sovereign bonds.
Wall Street has maintained its northbound journey year to date after an astonishing 2020. Nationwide deployment of COVID-19 vaccines, a significant reduction in new coronavirus cases and expectations of a fresh round of large fiscal stimulus strengthened market participants' confidence in risky assets like equities. As a result, funds have been reallocated to stock markets from safe-haven government bonds, resulting in a huge spike in long-term bond yields.
Financial Sector to Benefit From Higher Yields
On Mar 8, the yield on 10-year U.S. Treasury Note rose 4.3 basis points to 1.594%, marking its highest closing since Feb 13, 2020. The yield on 30-year U.S. Treasury Note rose 2 basis points to 2.306%, its second-highest level of 2021. On Feb 25, the yield of the benchmark 10-year Note jumped to 1.614%, its highest since Feb 14, 2020. Notably, the yield was hovering around 0.9% at the end of 2020.
Higher risk-free return is detrimental to high-growth industries like technology as most of these companies depend on easy borrowing at cheap rates. However, a hike in interest rate will raise the cost of funds, which in turn will enable the financial sector, like investment and retail banks, insurance companies and loan providers to widen the spread between longer-term assets, such as loans, with shorter-term liabilities, thus boosting the sector’s profits margin.
Consequently, the Financial Select Sector SPDR (XLF), one of the 11 broad sectors of the benchmark S&P 500 Index that lost 1.7% in coronavirus-impacted 2020, has surged 15.8% year to date. Except for energy, finance is the only sector that has witnessed double-digit returns so far in 2021. Meanwhile, the SPDR S&P Regional Banking ETF (KRE) has soared 32.9% year to date.
Other Near-Term Drivers
First, the U.S. government has accelerated COVID-19 vaccinations. The speeding up of the vaccination process implies chances of faster-than-expected reopening of the U.S. economy. This will benefit cyclical sectors like financials, industrials, materials, energy and consumer discretionary. Reopening of the economy with the easing of the pandemic will significantly ramp up business activities and loan requirements.
Second, President Joe Biden is likely to sign the revised $1.9 trillion coronavirus-aid package in a bill before Mar 14. The revised plan will include a direct payments of $1,400 and supplemental unemployment benefits to $300 per week through Sep 6. This stimulus is expected to boost consumer spending meaning higher demand for businesses. This will induce businesses to hike capital expenditure and therefore lead to a growing demand for credits and loans from financial companies.
Third, a major part of businesses of most of the regional banks consists of issuing 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 also continue. This will compel small businesses to access the credit market to expand the scale of operation and renovations.
Our Top Picks
At this stage, it will be prudent to invest in financial 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 five financial behemoths (market capital > $50 billion) as these companies have a strong capital base and an established business model. These stocks have popped more than 15% year to date.
Moreover, all these stocks have strong long-term (3-5) growth prospects and are regular dividend payers providing an important income stream during a market downturn. Finally, each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see
. the complete list of today’s Zacks #1 Rank stocks here
The chart below shows the price performance of our five picks year to date.
The Goldman Sachs Group Inc. ( GS Quick Quote GS - Free Report) has an expected earnings growth rate of 18.9% for the current year. The Zacks Rank #2 company has a long-term growth rate of 19.2%. The Zacks Consensus Estimate for the current year has improved 2.5% over the last 7 days. It has a current dividend yield of 1.53% and the stock price has jumped 26.8% year to date. Bank of America Corp. ( BAC Quick Quote BAC - Free Report) has an expected earnings growth rate of 32.6% for the current year. The Zacks Rank #2 company has a long-term growth rate of 7%. The Zacks Consensus Estimate for the current year has improved 0.8% over the last 7 days. It has a current dividend yield of 1.95% and the stock price has climbed 22.5% year to date. Capital One Financial Corp. ( COF Quick Quote COF - Free Report) has an expected earnings growth rate of more than 100% for the current year. The Zacks Rank #1 company has a long-term growth rate of 14.7%. The Zacks Consensus Estimate for the current year has improved 0.4% over the last 7 days. It has a current dividend yield of 1.25% and the stock price has soared 30.2% year to date. The Charles Schwab Corp. ( SCHW Quick Quote SCHW - Free Report) has an expected earnings growth rate of 17.1% for the current year. The Zacks Rank #2 company has a long-term growth rate of 11.3%. The Zacks Consensus Estimate for the current year has improved 6.3% over the last 30 days. It has a current dividend yield of 1.11% and the stock price has rallied 21.6% year to date. Morgan Stanley ( MS Quick Quote MS - Free Report) has an expected earnings growth rate of 11.1% for next year. The Zacks Rank #2 company has a long-term growth rate of 10%. The Zacks Consensus Estimate for the current year and next year has improved 1.6% and 1%, respectively, over the last 30 days. It has a current dividend yield of 1.73% and the stock price has appreciated 18.4% year to date. These Stocks Are Poised to Soar Past the Pandemic
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