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Financials Sector Rating: Marketperform

The flattening and inversion of portions of the Treasury yield curve this year has had a big impact on the Financials sector. Typically when the curve steepens—that is, when longer-term yields are higher than short-term yields—it’s helpful for financial institutions, which generally borrow at short-term rates and lend at longer-term rates. However, the reverse is true when the curve flattens or inverts, as it has done this year.

On the positive side, the string of Federal Reserve rate hikes between 2015 and 2018 have boosted interest income, even though the Fed has recently reversed some of those hikes. Financial companies’ balance sheets appear solid and dividend payments from major banks have increased.

However, there are challenges, as interest rates remain low from a historical standpoint, and the yield curve has flattened and inverted. Revenue has been increasingly tied to net interest income since the financial crisis and now those margins are shrinking. The Fed’s Senior Loan Officer Opinion Survey also has noted softening demand for certain types of loans. The record-high debt load held by nonfinancial corporations is a risk, but consumer and corporate balance sheets are in substantially better shape than they were during the financial crisis in 2008, leading us to believe the sector can avoid a repeat of the debacle seen in that period.

We maintain relative confidence in the ability of the financial services industry to reshape itself and adjust to the changing environment. For now, we continue to keep our marketperform rating on the group and to urge clients to remain patient.

What do the ratings mean?

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

Communication Services Industrials
Consumer Discretionary Information Technology
Consumer Staples Materials
Energy Real Estate
Health Care Utilities


What You Can Do Next

Energy Sector Rating: Marketperform
Health Care Sector Rating: Outperform

Important Disclosures

Schwab Sector Views do not represent a personalized recommendation of a particular investment strategy to you. You should not buy or sell an investment without first considering whether it is appropriate for you and your portfolio. Additionally, you should review and consider any recent market news. Supporting documentation for any claims or statistical information is available upon request.

All expressions of opinion are subject to change without notice in reaction to shifting market or other conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. For more information on indexes please see

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Investing involves risk including loss of principal.

The Federal Reserve’s Senior Loan Officer Opinion Survey on Bank Lending Practices is a survey of up to 80 large domestic banks and 24 U.S. branches and agencies of foreign banks. The Federal Reserve generally conducts the survey quarterly, timing it so that results are available for the January/February, April/May, August, and October/November meetings of the Federal Open Market Committee. The Federal Reserve occasionally conducts one or two additional surveys during the year. Questions cover changes in the standards and terms of the banks' lending and the state of business and household demand for loans. The survey often includes questions on one or two other topics of current interest.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.


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