Over the past few weeks, tech stocks have slumped as investors turned back to sectors they see positioned to most benefit from a Trump tax cut. As the new proposal seeks to slash the corporate tax rate, investors have lifted shares of banking stocks, with the Financial Select Sector SPDR Fund up 6% over the past two weeks. On top of the idea that the tax bill could provide a boost to the financial industry’s bottom line, analysts’ bullish notes on a pickup of growth in the industry has also worked to help stocks. (See also: Trump Tax Plan ‘As Good as It Gets’ for US Banks.)
Gradual Fed Interest Rate Hikes to Lift Profits
“I think the strength that we’re seeing, and it started a couple of weeks ago, I think that’s marking a new leg of outperformance here,” said Oppenheimer’s Ari Wald in an interview with CNBC.
“What gives us conviction that this strength can continue is just how broad-based it’s been. It’s not just the banks; it’s the banks, it’s the brokers, it’s insurance companies, it’s the online exchanges, it’s the asset managers. What we think this is, is a new turn, a round of leadership that should continue into the first quarter of 2018,” said Wald. “Buy financials. They’re breaking higher.” The Oppenheimer analyst specifically recommends buying Bank of America Corp. (BAC).
Last week, Wall Street research firm CFRA also upgraded its outlook on financials. Analyst Lindsey Bell suggested that banks should benefit from a gradual improvement in loan growth, along with more interest rate hikes under the incoming Federal Reserve chair Jerome Powell. Higher interest rates lead to an increase in bank profits by widening the difference between the interest income generated from loans and the amount of interest paid out to savings account holders. (See also: Tech Founders See $7.6B Value Wiped Away In One Day.)