After a rough 2018, financials have had a very good year.
Last week, the sector rallied to a new high for the first time since 2007, with names like Bank of America (NYSE: BAC), Citigroup (NYSE: C), Goldman Sachs (NYSE: GS), and JPMorgan (NYSE: JPM) all surging higher.
All four of these stocks are outperforming the S&P 500 this year. Since the start of 2019, Bank of America shares are up 41.84%, Citigroup is up 50.21%, Goldman Sachs is up 37.65%, and JPMorgan shares are up 40.7%.
The XLF S&P 500 Financials Sector SPDR ETF is having its best year since 2013 and is up 29.3% year-to-date. Oppenheimer’s Ari Wald noted that the stabilizing of interest rates and the overall bullish market conditions could drive the ETF even higher.
“We can see financials basing versus the S&P 500, the turn in its 200-day moving average now breaking above resistance,” Wald said. “You see a lot of similarities to the fourth quarter of 2016, that’s how we’re thinking about returns into 2020. … We think there’s more upside for leadership here.”
The XLF is also bumping up against the resistance set by its old high reached in 2007.
Chantico Global CEO Gina Sanchez agrees that a breakout is ahead for the sector.
Sanchez says that the market is “favoring cheaper stocks, and banks definitely fall into that category.” She also pointed out that the current interest rate environment and banks’ issuance will be positives moving into a larger rally.
“Remember that [banks’] revenues are driven by two major things: their net interest margins and fee income,” Sanchez said. “Net interest margin is determined by the shape of the yield curve, and since the Fed cut the short end of the yield curve down, it steepened the curve enough so that banks can continue to make money.”
RBC Capital Markets’ Gerard Cassidy says the rally in bank stocks should continue into 2020 as a strong economic backdrop, increased merger and acquisition activities, and a supportive regulatory environment act as tailwinds on the sector.
Cassidy expects bank valuations will climb next year, and said that bank stocks will be some of the biggest beneficiaries as investors move back into value stocks in what he calls the “value comeback”
The analyst is bullish on bank stocks for next year and his recommendations include Bank of America, Citigroup, Comerica (NYSE: CMA), JPMorgan, Huntington Bancshares (NASDAQ: HBAN), Investors Bancorp (NASDAQ: ISBC), KeyCorp (NYSE: KEY), M&T Bank (NYSE: MTB), Morgan Stanley (NYSE: MS), Northern Trust (NASDAQ: NTRS), PNC Bank (NYSE: PNC), Sterling Bancorp (NYSE: STL), Truist Financial (NYSE: TFC), Valley National Bancorp (NASDAQ: VLY), Western Alliance Bancorporation (NYSE: WAL), and Zions Bancorporation (NASDAQ: ZION).