Despite historically low-interest rates weighing on bank earnings, the Financial Select Sector SPDR Fund (NYSE:XLF) is up 27.5% in 2021, more than double the return of the SPDR S&P 500 ETF Trust (NYSE:SPY).
Earnings Expectations: On Thursday, DataTrek Research co-founder Nicholas Colas said investors should stick with the financial sector for at least two reasons.
First, Colas said financial sector earnings estimates appear too low, leaving room for upside earnings surprises. The current FactSet consensus analyst earnings growth estimate for 2022 is -0.9%, making the financial sector the only sector analysts are expecting to report an earnings decline next year. Colas said those numbers make very little sense against a background of break U.S. economic growth
Related Link: 3 Top Bank Stock Picks For ‘Goldilocks Inflation’ Cycle
Investor Sentiment: Second, Colas said investor sentiment toward financials is currently “dreadful,” potentially opening the door for the sector to continue to climb a wall of worry.
Analysts are currently projecting just 3.4% upside for the financial sector over the next 12 months, well below the 13.6% upside they see for the S&P 500 as a whole. Meanwhile, the financial sector trades at just 14.9 times forward earnings estimates, making it the cheapest industry group in the market.
“Financials, in short, are a contrarian bet with a cheap rate hedge thrown in for good measure,” Colas concluded.
The next major catalyst for the financial sector will be annual Federal Reserve stress tests due out on June 24. The results of the stress tests will give investors some insight into how aggressively banks will be investing in share buybacks.
Benzinga’s Take: Colas’ bullish view on the financial sector lines up with expectations that Bank of America analyst Erika Najarian discussed last month.
Najarian said the U.S. is currently experiencing “Goldilocks” inflation levels of above 2% but not too high to spook the Fed, a scenario that has historically been extremely good for bank stocks.
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