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Schwab Sector Views

Schwab Sector Views: Fantastic Financials?

Key Points
  • The financials sector has had a decent run since the 2016 election, boosted by a more favorable regulatory environment and more business-friendly policies.

  • Higher interest rates and favorable credit conditions also have been good for the sector, and appear likely to continue to provide support.

  • We believe the financials group will continue to outperform.

Schwab Sector Views is our three- to six-month outlook for 11 stock sectors, which represent broad sectors of the economy. It is designed for investors looking for tactical ideas. We typically update our views every two weeks.

Just the Beginning?

The financials sector experienced a traumatic decade after 2007, beginning with a financial crisis that led to a complete reconstruction of the group, during which several long-time stalwart companies ceased to exist. In the aftermath, investors seemed to largely shun the financials sector—and for good reason, in our view. Management teams had to be replaced, government bailouts had to be paid back, harsh restrictions were placed on some of the sector’s activities, and trust in much of the group had been destroyed.

However, after the perfect storm of bad news seen in the aftermath of the housing collapse, we may be seeing perfect conditions for the renaissance of the sector.

Financials have perked up after a tough decade

Past performance is no guarantee of future results.

The 2016 U.S. elections appear to have been a turning point, ushering in a White House and Congress both believed to be, at the very least, less hostile toward the financials sector than the previous administration. As often happens in Washington, the pendulum tends to swing too far in one direction or the other: Leading up to the 2007-08 financial crisis, the pendulum had swung too far in the deregulatory direction, especially on mortgage standards and capital requirements, while—in our view—the pendulum subsequently swung too far toward stricter regulation.

The centerpiece of the regulatory storm is the Dodd-Frank Act (formally titled the Wall Street Reform and Consumer Protection Act), which imposed a vast array of new rules and restrictions, many of which continued to be in various states of finalization and progress at the time of the election, according to Davis Polk and Wardell LLP (roughly 80 rules, or 21% of the Act, still needed to be completed).

But the new administration has pledged to “dismantle” the Dodd-Frank Act. That process is more complicated than it may seem, but some reforms appear to be coming in the form of the Economic Growth, Regulatory Relief and Consumer Protection Act currently making its way through Congress, which would raise the asset threshold for being designated systemically important financial institutions among other provisions. The bill doesn’t go as far as some in the industry would like, while it goes too far for some. Not the perfect bill, certainly, but in our view it moves the pendulum in a direction that is positive for the prospects of the financials sector.

Not just politics

While the political process has dominated investors’ attention, the fundamentals of the group also look to be solid, in our opinion, and that’s where much of the attention should be.

First, this past summer was the first time since the financial crisis that all examined banks passed “the Fed’s extremely stringent stress tests with flying colors,” according to BCA Research. As a result, financial companies are able to increase both their dividend payouts and their buyback plans, both of which have improved recently, according to month-end data compiled by Thomson Reuters.

Further, Ned Davis Research (NDR) reports that of all the sectors, financials have the highest correlation with Treasury yields, which should bode well for the group if yields continue to creep higher, as we expect they will.

Higher yields should help financials.

And consumers just now appear to be adding somewhat to their debt levels, while the default and non-performing loan rates remain low.

Consumer debt appears to have room to grow ...


... but defaults remain low ...

... as do non-performing loans.

And for those worried about valuations, we believe the financial sector still offers decent value. NDR notes that earnings revisions are positively elevated relative to the sector’s history, while BCA reveals that the ratio of return-on-equity to price-to book values for banks remains well below the normal ratio. And with the group potentially receiving tailwinds from an increase in millennials looking to buy houses—as well as the increase in volatility in stock trading, which can lead to higher trading revenues—we believe the group is on track to continue to outperform during the coming months.

Millennials may be looking to buy more houses.

Higher volatility could help trading revenue.

Of course, this doesn’t mean that all is clear—there are always risks. Should recent trade fears escalate into a trade war, the financial sector may hold up better than some others, but would be at risk from a slowing economy and the potential of a bump-up in loan defaults. Further, as we’ve seen frequently over the last several years, should yields again retreat, financials would likely be hurt. We don’t foresee those things occurring at this point, but they are a reminder to stay diversified and watch for changing conditions.


Schwab Sector Views: Our current outlook


Schwab Sector View

Date of last change to Schwab Sector View

Share of the
S&P 500 Index

Year-to-date total return as of 03/13/18

Consumer discretionary





Consumer staples















Health care










Information technology










Real estate















S&P 500®  Index (Large Cap)





Source: Schwab Center for Financial Research and Standard and Poor’s as of 02/28/18.

Clients can use the Portfolio Checkup tool to help ascertain and manage sector allocations.

What is Schwab Sector Views?

Schwab Sector Views is our three- to six-month outlook for 11 stock market sectors, which are based on the 11 broad sectors of the economy.

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 rest of the market.
  • Underperform: Likely to perform worse than the rest of the market.
  • Marketperform: Likely to track the broad market.

How should I use Schwab Sector Views?

Investors should generally be well-diversified across all stock market sectors. You can use the Standard & Poor’s 500 allocations to each sector, listed in the chart above, as a guideline.

Investors who want to make tactical shifts in their portfolio can use Schwab Sector Views’ outperform, underperform and marketperform ratings as a resource. These ratings can be helpful in evaluating and monitoring the domestic equity portion of your portfolio.

Schwab Sector Views can also be useful in identifying stocks by sector for potential purchase or sale. When it’s time to make adjustments, Schwab clients can use the Stock Screener or Mutual Fund Screener to help identify buy or sell candidates in particular sectors. Schwab Equity Ratings also can provide an objective and powerful approach for helping you select and monitor stocks.

Talk to Us

To discuss how this article might affect your investment decisions:

  • Call Schwab anytime at 877-338-0192.
  • Talk to a Schwab Financial Consultant at your local branch.
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Materials Sector Rating: Marketperform

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.

Performance may be affected by risks associated with non-diversification, including investments in specific sectors. Each individual investor should consider these risks carefully before investing in a particular security or strategy.

All expressions of opinion are subject to change without notice in reaction to shifting market and 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.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly. Past performance is no guarantee of future results.

The S&P 500 Index is a market-capitalization-weighted index comprising 500 widely traded stocks chosen for market size, liquidity and industry group representation.

The Chicago Board of Exchange (CBOE) Volatility Index (VIX) is an index which provides a general indication on the expected level of implied volatility in the US market over the next 30 days.

Ned Davis Research (NDR) Sentiment Poll  shows perspective on a composite sentiment indicator designed to highlight short- to intermediate-term swings in investor psychology.

The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of Morgan Stanley Capital International Inc. (MSCI) and Standard & Poor’s. GICS is a service mark of MSCI and S&P and has been licensed for use by Charles Schwab & Co., Inc.

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


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