The higher the stock market rises, the more important it is for investors to be selective in the stocks they choose. In a new report, Credit Suisse analyst Lori Calvasina says the financial sector has the most upside for investors in the near future.
The Financial Select Sector SPDR Fund (ticker: XLF) is already up 21.7 percent since Election Day, but Credit Suisse says the hot streak may continue. Many investors believe that President Donald Trump’s policies emphasizing lower corporate tax rates, corporate deregulation and economic nationalism have created the perfect storm for bank stocks.
According to Calvasina, insurance stocks and diversified financials are in an even better position than banks to benefit from the current environment.
“For all three groups, earnings momentum has been in a strong uptrend (and in the case of banks and the broader sectors, is high in terms of level versus other areas), valuations remain attractive or reasonable relative to the broader market on our models, interest rate sensitivity is generally positive, and we do not see signs of crowding risk,” Calvasina says.
Trump has already taken steps to eliminate provisions of the Dodd-Frank Act that have weighed on earnings in the financial sector in recent years. The Dodd-Frank Act was created during the Obama administration to increase financial sector regulation and help prevent the type of abuses that led to the 2008 financial crisis.
Banks typically profit by taking advantage of a metric called net interest margin, which is the difference in the interest rate a bank charges borrowers and the interest it must pay out on deposits. The higher the Federal Reserve raises the fed fund rate, the more flexibility banks have to expand their margins.
For insurance stocks, higher interest rates increase the earnings power the companies have from their bond portfolios. Insurers are required to invest in extremely safe debt as collateral for their insurance policies.
In addition to the financial sector, Credit Suisse is also bullish on media stocks, commercial and professional services stocks, transportation stocks and pharmaceutical/biotech stocks. Key underweight sectors include capital goods, materials, food and staples, tobacco and utilities.
In terms of the overall market, Credit Suisse is…
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