According to Denise Chisholm, the director of quantitative market strategy at Fidelity, financial stocks are shaping up to have a promising year. Despite their strong performance over the past months, these stocks, known for paying good dividends, are still regarded as a bargain. Chisholm points out that while the SPDR S&P Bank ETF (KBE) surged by 20.5% in 2024 and the SPDR S&P Regional Banking ETF (KRE) went up by 15%, the S&P 500 saw a 23% rise last year.
Earnings growth is starting to pick up for financial stocks, Chisholm notes, which historically makes this a prime time to invest in them. Typically, interest in financials spikes when they are rebounding from lower earnings, as is currently happening. For those interested in dividends, financials seem particularly attractive right now. Although utilities might offer higher yields, they’ve already exceeded expectations and might not continue to perform as well in the future, she suggests. Financials, on the other hand, not only offer dividends but are also considered attractively priced.
Both the KBE and KRE are offering decent returns with a 30-day SEC yield of 2.37% and 2.65%, respectively, while each carries an expense ratio of 0.35%.
Chisholm highlights a couple of unique factors at play in the financial sector right now. One key aspect is the widening of valuation spreads. This happens when investors dump what they perceive as risky assets, like mid- or small-cap banks that might be unstable, and flock to what they deem safer bets, like diversified banks such as JPMorgan or firms in the capital markets. This spread creates a potential for outperformance in the financial sector.
She also stresses that current concerns about the industry are already built into stock prices. What is particularly interesting, according to her, is the rare combination of interest rates and credit spreads. This sector hasn’t encountered such conditions in decades. Financial performance isn’t solely dependent on the interest rate environment; it’s the interplay between rates and credit spreads that really counts, she explains. As credit spreads tighten and interest rates decrease, the financial sector hits an optimal zone. This blend, Chisholm believes, presents a prospect for more sustainable alpha, marking a scenario not seen in nearly 20 years.
