The banking sector is in a unique time and place as investors navigate economic conditions, with interest rates rising over longer periods of time held by the Federal Reserve. As part of Good Buy or Goodbye, Infrastructure Capital Advisors CEO Jay Hatfield joins Yahoo Finance’s Julie Hyman’s studio to explore investment opportunities seen at financial institutions, namely Goldman and his Sachs (GS) Focus.
Goldman is a champion of Hatfield among investment banks, pointing to the firm’s year-to-date outperformance, its position as a derivatives AI business, and its IPO market forecast.
“We believe the AI IPO boom will start in 2018.” [2025]”The reason the U.S. capital markets are so efficient is that high valuations for public companies generate IPOs, which they usually do,” Hatfield said. That’s why I don’t think stocks are overvalued, even though they’re performing well now, and I even think they’ll be even better after the summer, at least with a rate cut by the ECB. [European Central Bank]A gathering will be held in 2025. ”
Hatfield, on the other hand, takes a bearish view on regional banks, citing the rising interest rate environment and pressure on credit markets.
See more of Good Buy or Goodbye on Yahoo Finance or watch this entire episode of Market Domination.
This post was written by luke carberry morgan.
video transcript
It’s a big noisy world of stocks out there.
Welcome, goodbye, goodbye.
Our goal is to cut through that noise and help you navigate the best moves for your portfolio.
They’re going through the banking sector and Jay Hatfield, Infrastructure Capital Advisors, CEO J, is here to talk to me and show you his favorite stocks.
beginning.
First up is Goldman Sachs.
So, interestingly, Goldman Sachs has already performed pretty well over the past year.
You can see that the stock price rose and rose again after the most recent earnings report.
So let’s take a look at why we still love it.
First of all, you said it’s still trading at a relatively attractive multiple.
yes.
In fact, we’re forecasting to beat consensus by 10%.
So the consensus is 11x and we are 10x.
And the main reason we’re above consensus is because we’re more optimistic about investment banking, and Goldman is actually a pure investment bank of all investment banks.
I don’t think most people understand, but I used to work in an investment bank.
Well, they don’t appreciate the synergies between investments, banks and capital markets.
So when you trade, you generate extra trades in your trading business, and we saw that in the first quarter, but it really just outperformed the company as a whole.
Yeah.
So let’s dig a little deeper into that because we’re looking at bond underwriting.
We also see that the capital markets are starting to pick up a bit in some areas.
We’re going to see a little more M and A, and a little more initial public offering.
So you think that’s going to be good for me, please do that.
And even in 25 years, we just had a great AI segment.
We believe the AI IP boom will begin in 2025. Usually it is. The reason why the US capital markets are so efficient is because, as we know, high valuations of listed companies create IP OS.
So we think this is going to be a bit of a long-term commitment.
That’s why I think stocks are performing now, but I don’t think they’re overvalued, and I think they’ll be even better after at least a rate cut by the ECB and then a summer of recovery in 2025. We are thinking about it, aren’t we?
I think the last one was a derivative AI play.
There is also the fact that they have withdrawn from the consumer business and sound.
No, even more so now, well, back then it was just pure fun.
They got into the consumer business.
It wasn’t that hot so they got out of there.
So they got back on track.
And I think that’s why the multiples are going down, like Morgan Stanley is trading at 13x.
They were more resilient during recessions because they had more stable asset management.
Goldman’s More is about 80% in banking and investment banking, while Morgan Stanley’s is 40%.
So we think it’s time to move from a safe state to a more secure state.
So, you’re probably not going to get out of Morgan Stanley, but you’re running out of money.
That’s true, but together they could trade pretty well.
But it will take a little more effort to further increase Goldman Sachs’ influence in banking.
Well, we always like to talk about what the risks are in this situation. In this case, if the market does not perform well, the market may become a victim of it because it does not have that insulation. , right.
This is a completely bull market strategy.
I remember when I entered Wall Street at Morgan Stanley during the downturn in 1989, sales were 0.4 times sales.
I mean, investment banks used to just go bankrupt.
So these are high beta stocks, 1.2 beta, and highly correlated in the market.
If we are wrong, we are bullish on the market and our target is 5750.
But if we’re wrong about that, you don’t want to be in finance, and you certainly don’t want to be in investment banking. You guys are in a pretty decent position and that’s our biggest position at icap.
So we’re pretty bullish on this, but it’s an area where we know we’re in Manhattan.
I worked in an investment bank.
In our view, when things start to go well, we understand that this is just the beginning of the boom.
Okay, let’s go into an area that we don’t necessarily want to go to.
And this is often seen in local banks.
What we have here is just one example of a regional financial institution where PNC’s financials have significantly underperformed other financial institutions and some of the larger institutions over the past year.
So they don’t have as much of an advantage as being in the capital.
5% of them choose PNC.
They represent only 5% of the capital market.
Caught.
I mean, compare it to Goldman.
I mean, that’s it.
right.
that’s right.
So one of the reasons they’re not making money is that their net interest margins are being squeezed, and talk to us about how that’s working out for the region in relation to interest rates.
Accordingly, PNC expects its net interest margin to decline by approximately 5%.
And the problem is when interest rates rise very quickly, what we call the deposit beta, or the sensitivity to interest rates, starts to rise. This is just a complicated expression of what people perceive as being able to earn 5%.
So they’re not going to leave money in a checking account or a six-month CD.
So they’re seeing these outflows, which means they’re under pressure because it’s only March, and loan growth is slowing.
Well, they’re probably being conservative about releasing credits now.
So these two things that are putting pressure on us might get better in 25 years.
However, some local banks are in decline, while others are rapidly growing and focus on investment banking. They also tend to have less exposure to interest margins.
And the other thing is, we’ve all been trying to read consumer sentiment from payment companies, whether it’s local banks themselves or paying later from retailers.
And I feel like we’re starting to see some deterioration, at least on the lower end.
absolutely.
So, if you think about it for a second, American consumers are divided into haves and have-nots. Those who owned a home did very well because of inflation, but those who didn’t did very poorly because they had to pay a lot of money. Now it’s flat. However, the high rent that does not go down.
So if wages don’t catch up, it’s unclear how that will play out, but it will certainly put pressure on lower-income consumers.
But if you look at the more investment banking-oriented companies, especially Goldman, which is now exiting its investment banking, they have less exposure to that kind of thing.
The credit exposure of these large banks is difficult to track.
It is not like a reed that all buildings can be modeled on.
So we don’t know what’s actually going on, but it’s a potential downside.
And could it be that defaults, for example, have an impact and are already slowly rising?
I don’t think it will be terrible, but if the Fed doesn’t cut rates, the recession may slow.
So we just take more risks without getting the investment bank’s profits.
Conversely, I want to talk about what will work for localities, which you just mentioned, the Fed could potentially cut rates, or perhaps cut rates a little more aggressively than expected. But it is that?
If they materialize and the yield curve inverts, then we’re well into 25.
So, in the long run, banks will do well.
By the way, if there is a bull market, risky and cyclical stocks will rise.
So you could probably be in a situation where you invest for 25 years. Perhaps investment banking is already at full capacity and then it’s time to rotate to 25 years and benefit from the gradual improvement in net interest margins.
Are there any positions available for local teams?
To a certain degree, we’ve intentionally moved completely out of the region, taking capital not only from investment banks, but also from money center banks, which tend to be less reliant on net interest margin and better hedged. There is a lot of room for the market to rise. .
Therefore, in our opinion, they are in a better position in this market.
got it.
So, Jay, let me summarize what you’re telling everyone.
You say you recommend buying Goldman Sachs given the multiple potential benefits from instruments such as rational trading, debt and other capital markets underwriting, and AI-related IP OS. However, he says regional banks should be avoided as upside from capital markets is limited. .
They are not exposed as much.
Interest rate cuts could put pressure on profitability, and credit metrics could deteriorate further.
And thank you so much for being here.
Nice to meet you, thank you for visiting.
Goodbye, goodbye.
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