Why Goldman Sachs Believes Financial Stocks Look Attractive
The market rally
Various US indexes such as the S&P 500 Index (SPY), the Dow Jones Industrial Average (DIA), and the NASDAQ Composite Index have performed well since the US election. Among the various sectors, the financial sector has seen a strong improvement since the US election and is currently one of the leading sectors in the S&P 500 Index (QQQ) (IVV).
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Goldman Sachs on the financial sector
The Financial Select Sector SPDR ETF (XLF), which tracks the performance of the financial sector, rose nearly 23.6% between November 8, 2016, and March 7, 2017. The S&P 500 Index rose nearly 10.8% during this period. After providing a strong performance in the last four months, Goldman Sachs (GS) still believes that the financial sector could continue to perform well.
The Fed’s more hawkish tone is one of the major reasons behind the rising expectations for the financial sector. A gradual increase in interest rates could benefit the financial sector, as it could increase companies’ profit margins. The Fed already indicated that we could see three rate hikes in 2017, which is increasing investors’ expectations about the financial sector (VFH).
Goldman Sachs wrote in a note to clients, “Among S&P 500 industries, banks and diversified financials display the highest positive correlation with both rising rates and inflation; we recommend investors overweight the financials sector based on our expectation that the Fed will hike three times in 2017.”
In the next part of this series, we’ll analyze the performance of Bank of America.