Wall Street is at war with traders over the future of bank stocks

pulse

July 5, 2017 5:02 PM

Despite strong recent performance and appealing fundamentals going forward, bank stocks are not feeling the love from Wall Street analysts.

Mel Gibson, upon hearing how Wall Street analysts are underrating bank stocks.

One of the equity market's hottest industries isn't feeling the love from Wall Street.

Bank stocks, which have surged an S&P 500-best 32% since the US presidential election, are seeing a disproportionately low number of buy ratings from research analysts.

Only about 35% of bank stocks have a buy rating, while similarly outperforming areas like semiconductor and software companies are seeing roughly 60% of stocks get a bullish nod from analysts, according to data compiled by Strategas Research Partners.

Buy ratings on bank stocks are particularly scarce when you consider all the elements working in the sector's favor going forward. As the group most sensitive to bond yields, banks are best positioned to benefit from any interest-rate hikes implemented by the Federal Reserve.

Bank stocks are also seen benefiting from the looser regulatory environment that has been proposed by President Donald Trump. In a recent client note, Goldman Sachs banks analyst Richard Ramsden forecast that potential deregulation of the financial industry could "increase returns to shareholders and boost bank EPS by 11%."

Further, with bank earnings season set to kick off next Friday, the group could get a boost from profit growth that's expected to be among the best in the S&P 500. Banks will expand earnings by 7.2% in the period, better than any group outside tech and energy, according to forecasts compiled by Bloomberg.

The skepticism being expressed by Wall Street analysts is also surprising when you look at how well financial firms have done across the board over the past month.

An equal-weighted gauge of financial stocks has climbed 5.9% since June 7, the best of the 10 main S&P 500 industries by 2 full percentage points, according to Strategas data.

On the other side of the ledger is the tech sector, which, when stripped of the market-cap weighting that favors juggernauts like Apple and Amazon, has slipped 4% over the same period — underperformance that analysts appear willing to forgive.

But investors need not sit by idly. Strategas says the best way to play financial stocks right now is to take advantage of their underratedness and buy on weakness. Maybe then Wall Street will give credit where it's due.

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