The summer pullback in our Cyclical Macro Indicator (CMI) for the financial sector, caused by the tightening in financial conditions and the dip in overall credit growth, mortgage refinancing and narrowing yield curve, has nearly fully reversed. Our U.S. equity strategists recommend staying overweight S&P financials.
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C&I loans have spiked up to challenge their 2008 peak, and the corporate sector is shifting back to expansion mode. M&A activity is perking up, new issuance is booming, and the corporate sector financing gap has nearly fully closed, indicating that external capital requirements are headed up. Consumer deleveraging is far advanced, and the surge in asset prices is boosting consumer wealth to the point where confidence has improved by enough to spur strong durable goods purchases, such as autos and housing. Our Financial Sector Sales-Per-Share (SPS) Model is soaring, and is by far the strongest among all ten of our sector sales models, reinforcing that credit creation is set to accelerate.
Another positive for the financial stocks is the ongoing focus on profit margin preservation. Financial cost structures remain extremely lean. This reflects a well entrenched profit margin protection mindset following the Great Recession and financial crisis. Moreover, the easing in relative performance has pushed our valuation gauge back into undervalued territory, at a time when earnings estimates are too pessimistic.
Bottom line: Investors should continue to be bullish on S&P financials. (tweet this!)
Source: BCA Research
