The rally in financial stocks is experiencing a momentary pause, creating a golden opportunity for investors looking to enter the sector. The Financial Select Sector SPDR fund, which represents a diverse range of financial companies on the S&P 500, recently reached a peak of $37.99, marking a significant 21% gain from its multi-month low in October.
However, since hitting this peak, the ETF has experienced a slight decline of around 1%. This decline follows a dip in short-term interest rates, which initially propelled financial stocks higher. While lower rates may reduce the rates that banks can charge, they also have the potential to stimulate consumer demand, benefitting lenders. Additionally, investment banks can take advantage of lower borrowing costs to complete more deals. Nonbank players such as Visa and Mastercard often witness increased consumer spending when interest rates decline.
Fortunately, this month’s stock decline in the financial sector appears to be nothing more than a brief pause rather than the beginning of a substantial drop. Katie Stockton, founder and chief market technician at Fairlead Strategies, supports this optimistic outlook. She has observed a bullish shift in the market and predicts that the Financial Select Sector SPDR fund will continue to rise without experiencing a major pullback.
Several factors contribute to this positive forecast. Firstly, the ETF is receiving support above the $35 mark, indicating that buyers are stepping in to stabilize the price around this level. Secondly, while the financial sector has recently regained favor among investors, its resurgence is still in its early stages.
With all these factors in mind, now is the perfect time for investors to consider capitalizing on this brief dip in financial stocks. By taking advantage of this buying opportunity, investors can position themselves to benefit from the sector’s future growth potential.
ETF Performance Outpaces S&P 500
The exchange-traded fund (ETF) has been outperforming the S&P 500 since late October, surpassing it by several percentage points. Although the ETF had previously underperformed for an extended period, it has made significant gains in the past 12 months, rising approximately 8%. This represents about a third of the S&P 500’s increase. However, the ETF is still striving to reach its peak value of just over $41, achieved in early 2022.
Favorable Valuation in the Financial Sector
One key factor contributing to the ETF’s early rally is the relative cheapness of the financial sector. Markets have shown caution due to concerns about a potential economic slowdown, resulting in lower valuations. Currently, the ETF trades at 12.5 times analysts’ expectations for per-share earnings of its underlying assets in the upcoming year. In comparison, the S&P 500 is valued at 19.6 times earnings. According to FactSet, this marks the largest discount for the ETF in the past 10 years.
Positive Outlook for Financial Stocks
The positive technical trading trends witnessed in the financial sector can be attributed to actual developments within the economy and financial markets. Furthermore, these trends indicate a potential for further gains in stock prices. The rate of inflation has decreased by more than half from its peak in 2022, although it remains slightly above the Federal Reserve’s target of 2% at just over 3%. The anticipation of interest rate cuts by the Fed later this year is expected to support asset prices, stimulate continued economic growth, and boost revenue for financial firms. This combination sets a favorable backdrop for financial stocks.