JPMorgan Chase – Financial Stocks Could Be the Quarterback for a Value Comeback
The outlook for financial stocks is picking up, setting the stage for a broader comeback in value indexes and exchange-traded funds.
Financial Select Sector SPDR
ETF (ticker: XLF) is up about 23% since early November, beating the
‘s 10% gain. Financials are the largest weighting in the
iShares Russell 1000 Value ETF
(IWD) at 24% of the total. That ETF is also outperforming, up 15% in the past three months.
Banks and other financials are getting a lift from a few factors: A steepening yield curve is fueling optimism that net interest margins, critical to bank profits, will recover sharply. Large banks have a green light from regulators to resume share repurchases. The sector is also rising on hopes that the economy will recover sharply in the latter half of 2021—fueling loan activity and keeping credit losses down.
Financial companies delivered strong fourth-quarter earnings.
Bank of America
(WFC) all beat consensus earnings forecasts. Investment banks
(MS) topped estimates, as did brokerage
(SCHW) and financial data firm
While the sector has slumped a bit this earning season, Wall Street is increasingly bullish.
Financials could now be the “franchise quarterback” that leads a value recovery, according to Scott Opsal, director of research and equities at Leuthold Group.
Value and financials are closely synchronized, tending to move in tandem during market cycles, he wrote in a report on Thursday. Value beat growth by 96% in total from June 2000 to May 2007. Financials beat the S&P 500 by 59% in the span, Opsal notes. Value then fell behind growth for more than 13 years, underperforming by a total of 55% until August 2020. Financials trailed the S&P 500 by 64% in that period.
“When Financials are ‘on’ their game, a winning outcome for Value seems likely,” Opsal writes. “But if Financials are in a funk, the rest of the team is hard pressed to overcome a dud performance from its star player.”
Value has fallen so far behind growth—underperforming by 220% over the last decade—that reports of a comeback have become a running joke. Legions of false starts have fueled skepticism whether this time will be different, while growth has charged ever-higher, led by Big Tech.
A shift in market leadership from growth to value would entail investors giving up on tech, which is 55% of the Russell 1000 Growth ETF. That may be a tall order, with many big tech stocks beating earnings estimates. Investors would also need to gain confidence in health care and industrials, the second- and third-largest sectors in the Russell 1000 Value ETF.
Rising long-term interest rates and a steepening yield curve should be a tailwind for a value rotation. Whether it lasts will depend on the economy gaining momentum as vaccines curb the pandemic. Banks will have to do their part by beating Wall Street estimates, too, with other value sectors picking up the rear.
Write to Daren Fonda at [email protected]