FINANCIAL STOCKS SHOULD PAY OFF

But investors must be choosy about where to put money in this broad sector.

- BY NELLIE S. HUANG

FINANCIAL stocks are in a sweet spot. Lower short- term interest rates, an expanding economy and some spectacular third-quarter results all helped to buoy shares in businesses that provide financial products or services in late 2024. The outcome of the U.S. presidential election boosted the shares even more; Wall Street has high hopes that the Trump administration will be bank-friendly.

All told, over the past 12 months, financial shares surged 31%. That beat the 25% return in the S&P 500 index, as well as the gains in every other sector except communications services (up 40%) and information technology (up 37%). When the final results of 2024 are in, if analysts are on target, the financial sector will have posted a nearly 15% jump in earnings from 2023, more than the 10% hop in earnings expected for the S&P 500.

Will the party continue in 2025? Analysts expect financial companies to post 7% to 9% growth in earnings in 2025 compared with 2024. That’s “still supportive growth for financials,” says Matthew Bartolini, head of Americas ETF research at State Street Global Advisors, especially when you consider that the sector currently trades at a bigger discount to the broad market than it typically does. The financial sector’s price-tobook ratio (book value is assets minus liabilities)—one measure of the value of these kinds of firms—is currently at a 52% discount to the S&P 500 priceto-book ratio, says Bartolini; the typical discount is 44%.

Financials have some big-picture pluses in their corner, too. The economy has likely avoided a recession, and that’s good for banks, a prominent chunk of the overall sector. Also, short-term rates are moving lower, and longer-dated rates are inching up, which means the yield curve— the plotted line of interest rates of Treasuries with varying maturities—is now less inverted than it has been in recent years.