Financial stocks were rallying early this week after a rough last month that saw a deep sell-off in May.
And according to one expert, the rally in the sector is just getting started. Last weekend, Oppenheimer’s head of technical analysis, Ari Wald, upgraded the financials group despite their recent weakness.
“This is a play on cyclicals in general,” Wald said to CNBC on Monday. “These oversold conditions for interest rates, this is dry powder for cyclicals. Speaking in terms of the 10-year U.S. Treasury yield, the yield is currently over 60 basis points below its 200-day moving average – extremely stretched on the downside.”
Wald pointed to the 10-year Treasury, which just recently reached its most oversold condition since January 2015, falling from 2.42% to 2.14% in the last three weeks alone. If it moves higher again, Wald says that should be good for high-beta stocks, particularly financials which typically climb when the yield curve steepens.
There are two under-the-radar stocks in the sector that Wald likes now.
“The first one is S&P Global (NYSE: SPGI). The stock has had a fresh breakout above its 2018 high pint at $215, typically the breakout point becomes support and on the upside we think that breakout measures to $260,” Wald said. That $260 price target would see the stock 16% higher from its current price.
The second stock Wald likes is American Express (NYSE: AXP).
“Here’s a stock that broke above 2018 resistance ahead of the market, now more recently getting above its May peak ahead of the market,” Wald said. “Again, a sign of relative strength, a sign of leadership. These are names we expect continue to carry the market higher.”
BK Asset Management’s managing director of FX strategy, Boris Schlossberg, agrees with Wald about what will happen when bond yields begin to climb higher again.
“I think 2.10% was a near-term bottom and as the 10-year comes back up and goes to 2.50%, it’s going to be a natural re-steepening of the yield curve and I don’t think you really need to be that picky. Everything I think is going to go up,” Schlossberg said, referring to the financials sector.
As for which in the group he has his eye on now, Schlossberg likes JPMorgan (NYSE: JPM) as it has outperformed the financial sector over the past three months.
“It’s done really, really well even in this difficult environment and I think if we get a tail wind as the yields start to widen again it’s only going to become more profitable for them,” Schlossberg said. “So I just simply like taking the JPM trade into this assumption that the 10-year yields are going to go back up. That’s going to be the key thing.”
Of the three stocks, analysts are most bullish on JPM. There are currently 10 Buy ratings on the stock and analysts’ average price target is $123.69, suggesting possible upside of 13.2% over the next twelve months.