The S&P 500 Financials sector is up about 25% this year and a spate of positive bank earnings can continue to push the sector higher. Additionally, it opens up opportunities in leveraged ETFs.
As reported by Morningstar, some of the big names helping to pull banks higher are JP Morgan and Wells Fargo. Both saw strong third-quarter earnings results, leading Morningstar analysts to believe that their share prices are now hovering above market value.
The macroeconomic environment for banks is certainly much more favorable versus a couple of years ago when the U.S. Federal Reserve was raising interest rates. With rates expected to drop, this should add to banks’ bottom line when it comes to increased demand for loans and other lending products. In turn, investor sentiment is set to improve as the Fed continues to ease monetary policy whether it’s a swift cut of rates or a slow and steady easing.
“This represents a sharp reversal from 2022, when banks were deeply unpopular and materially undervalued. It’s an important reminder of sentiment’s role in short-term price changes,” Morningstar confirmed.
Other banks are also starting to churn out positive quarters with Bank of America among the more recent names. While the bank’s Q3 profit dropped, it still beat Wall Street estimates and paints a positive picture moving forward.
“The bank seems to be saying that things are getting better for them and all the challenges that they have faced in the last couple of years are easing,” said Dave Ellison, a portfolio manager at Hennessy Funds.
2 Trades to Consider in Financials
As mentioned, easing monetary policy should be a boon for banks that rely on lending products for revenue. That said, a pair of trades to consider in the financial sector include the Direxion Daily Financial Bull 3X ETF (FAS ) and the Direxion Daily Regional Banks Bull 3X Shares (DPST ).
For a broad financial trade, FAS is an ideal option, as it provides 300% exposure to the performance of the Financial Select Sector Index. The index incorporates companies from the following industries: banks; thrifts & mortgage finance; diversified financial services; consumer finance; capital markets; insurance; and mortgage real estate investment trusts (REITs).
DPST provides more focused exposure to regional banks, seeking 300% of the daily performance of the S&P Regional Banks Select Industry Index. It measures the performance stocks comprising the S&P Total Market Index that are classified in the Global Industry Classification Standard (GICS) regional banks subindustry.
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