Of course, investors are more concerned about the future, watching how demand for consumer and business loans fare in the face of a prolonged period of high interest rates and rising inflation. There are some silver linings: Analysts forecast financial sector revenues rose more than 40% in the fourth quarter and are on track for healthy growth in the first half of 2025.
Financial stocks are starting to look more attractive, says Michael Cuggino, president of the Permanent Portfolio Family of Funds, but investors should tread cautiously and look for companies that make significant revenue from fee-based business rather than scattering loan revenue, he says.
“The financials are interesting, but I would say a bit of caution,” he said. “I like companies with more diversified business portfolios,” he said, noting that he owns shares in Morgan Stanley.
,
Charles Schwab
,
visa
,
State Street
.
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Regional banks, which have been hit by concerns that commercial real estate loan values ​​will plummet, may also be attractive.
SPDR S&P Regional Banking
The exchange-traded fund is down 7% in 2024 and trades at 11.6 times expected earnings, compared with a price-to-earnings ratio of 16 times.
Financial Select Sector SPDR
ETFs. Despite the failure of several regional banks in 2023 and the near collapse of New York Community Bancorp earlier this year, large regional banks still maintain strong balance sheets.
High-quality banks in economically strong markets in the Southeast and other Sun Belt states should hold up, argues John Mowry, chief investment officer at NFJ Investment Group and owner of superregional PNC Financial Services Group.
,
Truist Financial, US Bancorp
,
First Financial Bankshares, a small bank in Texas
.
“Geographical lending exposure is important,” Mowry said. “These banks are connected to strong micro-economies across the U.S.”
But how strong is the overall economy? The June employment report showed signs that the labor market is softening. Investors (and the Fed) will also be keeping a close eye on June inflation numbers. If the core consumer price index, which excludes food and energy, and the producer price index numbers continue to approach an annualized 3% rate, that could increase the likelihood of an interest rate cut this year.
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Cindy Beaulieu, chief investment officer at Conning North America, said the Fed could cut rates in December. The cut could come sooner. After the June jobs report, traders were estimating a 75% chance of a rate cut at the Fed’s September meeting. Stocks could be volatile in the coming months as investors wait for a clearer picture on inflation. But that could be a good thing.
“You have to be prepared for more volatility, but that could be an entry point,” Beaulieu said. “If it dips, that could be a buying opportunity.”
And who knows: Maybe the upswing will spread beyond Big Tech after all.
Write Paul R. La Monica paul.lamonica@barrons.com
