It includes banks, savings-and-loan companies, insurance companies, investment funds, brokerages, mortgage finance companies and mortgage real estate investment trusts (REITs).
We believe the Financials sector will benefit from interest rate trends—while the Federal Reserve is expected to keep short-term rates low for now, improving economic conditions should contribute to rising longer-term Treasury yields. Typically when the yield curve steepens—that is, when longer-term yields rise higher relative to short-term yields—it’s helpful for financial institutions, which generally borrow at short-term rates and lend at longer-term rates. Also, relatively attractive valuations may provide some additional support.
Current fundamentals are in the middle of the pack, as revenue growth is expected by the market to be tepid in 2020. However, the recent slowdown in loan demand growth is likely to reverse with stabilization in economic growth, and could improve with a renewed acceleration in the economy. We may already be seeing early signs of that, as forward earnings estimate revisions have begun to move higher.
In terms of risk to our outlook, topline revenue growth may prove to be elusive as regulatory burdens remain high, and areas like asset management and brokerage services suffer from severe price competition and low short-term interest rates. Additionally, the sector’s sensitivity to interest rates and the stock market could translate into sharp underperformance should we see a significant pullback in the market.
Sector Overview: Financials is positive on Macro, Value and Relative Strength
Note: Each of the sector lenses shown above—Macroeconomic, Value, Fundamental and Relative Strength—is both intuitive and evidenced-based in nature. Within each, there are a varying number of factors. The Macroeconomic lens includes sector sensitivities to interest rates, stocks and the value of the U.S. dollar; the outlook for each of these is determined by the Schwab Center for Financial Research (SCFR)’s Asset Allocation Working Group, which uses a mosaic approach of quantitative and qualitative considerations. Value includes six different valuation metrics that provide a holistic perspective on current valuations relative to each of the sectors’ own historical valuations, as well as relative to the other sectors. Fundamental provides insight as to how efficiently the companies within each sector use invested capital to produce earnings; this historically has been informative as to future relative performance of the sectors. Finally, Relative Strength measures momentum of the individual sectors against all of the other sectors. We also consider the data in the context of factors outside the scope of these indicators—for example, geopolitical risk or anticipated tax legislation.
Source: Charles Schwab, as of 01/23/2020
The sectors we analyze are from the widely recognized Global Industry Classification Standard (GICS®) groupings. After a review of risks and opportunities, we give each stock sector one of the following ratings:
- Outperform: likely to perform better than the broader stock market*
- Underperform: likely to perform worse than the broader stock market
- Marketperform: likely to track the broader stock market
Want to learn more about a specific sector? Click on a link below for more information or visit Schwab Sector Views to see how they compare. Clients can log in to see our top-rated stocks in the Financials sector.
* As represented by the S&P 500 index
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