Please Sign in Before you can see the content

Set for Growth

Earnings estimates for financials are moving higher as many companies benefit from U.S. tax reform. The recent return of market volatility could further augment earnings for brokerages, exchanges and investment banks, which earn fees from trading activity. On a global basis, rising yields and rate-hike expectations could help lift bank stocks, which tend to be positively correlated to rate moves. This trend has been especially apparent in the U.S., as the 10-year Treasury yield hit a four-year high in February. (For an in-depth look at trends benefiting U.S. financials, please see the Sector Spotlight on page 5.)

Equity Investment Implications

We continue to like financials with strong franchises that we think can profit from rising rates and an improving economy, or that are exposed to structural growth opportunities. Some of the country’s largest banks are benefiting from low-cost deposits, significant digital and technological investments, and market share gains. These banks, as well as other financials, are also benefiting from the movement away from cash and checks to electronic and digital payments.

Fixed Income Investment Implications

We expect U.S. banks to profit from rising interest rates and tax reform. Regulatory rollbacks, if executed thoughtfully, could improve the earnings and, therefore, credit profiles of these companies. However, we are mindful that an excessive loosening of regulations could reverse creditor-friendly directives implemented in the wake of the financial crisis.