Are Banks Poised for Outperformance?
According to Wells Fargo, banks are set for a period of significant outperformance in the near future, driven by the so-called “Trump Trade” gaining momentum. The recent market activity has seen a shift away from mega-cap tech stocks towards small caps and other cyclical names.
This week, the Financial Select Sector SPDR Fund (XLF) has surged 3.7%, making it the top-performing industry during this period. Positive second-quarter financial reports from major banks like Bank of America, Morgan Stanley, and Citigroup have also fueled investor interest in the sector.
Wells Fargo analyst Christopher Harvey believes that the market rotation is driven by optimism surrounding President Trump’s potential re-election and his business-friendly regulatory policies. As a result, Wells Fargo has replaced healthcare with banks in its recommended sector barbell, expecting the group to outperform under a more favorable regulatory environment.
Harvey points out that bank stocks are currently trading at a significant discount and anticipates a rise in their relative price-to-earnings ratio in the near term. This move could potentially lead to a 15% outperformance over the next one to three months, similar to the post-election boost seen in 2016.
With the macroeconomic backdrop showing signs of improvement, including a steepening Treasury curve and increased merger activity, banks may be well-positioned for a period of outperformance. Keep an eye on this sector as it could present lucrative investment opportunities in the coming months.
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