Some analysts are noting that investors have been moving away from the tech sector and toward financials. There have been suggestions that the momentum toward bank stocks will continue well into 2018.
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Tech Versus Financial
Comparing two index funds, SPDR XLF on the financial side and SPDR XLK on the tech side, both of which track their respective sectors in the S&P 500, results from a week ago show XLF to be up 5.9% while the XLK is down 2.5%.
Over the same period, Bank of America is up 8%; Chubb is up 1%; JPMorgan is up 7%; and Morgan Stanley is up more than 5%. Other major banks like Goldman Sachs Group Inc. (NYSE:GSB) and Citigroup Inc. (NYSE:CC) are up 5% and 6% respectively.
One reason the street is feeling positive about the financial sector has to do with growing optimism that the Trump administration will soon bring relief to the industry through a relaxing of regulations and lower taxes. If, as Republicans predict, middle class taxpayers get relief and have more money to spend, a boost in the country’s gross domestic product could result in rising interest rates, another plus for the financial industry.
Rising interest rates help banks by widening the difference between the interest banks pay out and the income they receive by loaning money out. Overall, analysts have raised their 2018 earnings outlooks for financial services companies. Currently growth is expected to be 15.2% next year. In June it was expected to be 13.4%.
Some Pullback Expected
Analysts and experts do offer a word of caution for those expected the financial sector to show the almost unbridled growth the market in general has shown over recent years. In short, the 9-year-old bull market may be showing signs of winding down.
Few predict a catastrophe, but many suggest the optimism has been priced into the market and all it would take is “one bad thing” to cause a disruption. Signs pointing to 3% consumer price growth suggest a bump in inflation, something the market typically reacts to negatively.
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But No Collapse
For those who fear a 2008 collapse, fear not. At least according to the experts. At most, they suggest, a 10% correction unless (uh oh) there’s geopolitical trouble in the Middle East or Korea.
Specifically, analysts expect a slowing down but no collapse. Growth of about 2% is mentioned frequently. Risks include overvalued stocks, overextended consumers, a debt-ceiling deadline, tighter monetary policy, rising interest rates and, of course, those pesky geopolitical tensions.