Commodities may be the new new thing, but life in the financial world isn’t doing so badly either. In fact, financial stocks have enjoyed a strong run in recent years. The question is whether things can get any better for finance?
For the moment at least, it’s easy to say that more of the same is coming, a perspective that finds support by looking in the rear-view mirror. For the year through last month, for example, the S&P 500 Financials Spider ETF (XTF) ranks second in performance among the nine sector Spider ETFs, posting a total return of 17.1%. Only the S&P 500 Energy Spider (XLE) boasts a better record over that 12-month stretch, rising by 28.3%.
Delivering above-average gains at a time when interest rates are rising is no mean feat for financial stocks. In theory, an industry that thrives on cheap money should be hurt when liquidity starts to fade. But evidence in support of that textbook notion is scarce. Indeed, XLF has recently been making new highs–hardly the sign of anxiety about the future.
What’s more, Wall Street expects the robust earnings rise in financial stocks to continue for the foreseeable future. AltaVista Independent Research, an ETF-focused shop, points out in its latest report to clients that “financial earnings are the fastest growing of any [S&P 500] sector in 2006.” The good times are predicted to continue in the second quarter, for instance, with XLF’s year-over-year percentage change in earnings forecast to rise 10.5%, according to the consensus outlook. That represents a respectable third place in relative terms, coming after energy’s expected 17.6% rise and utilities’ 17.5%.
None of this comes as a surprise to the bulls. Wall Street, after all, has rewarded financials past record handsomely. Financials remain by far the biggest slice of the S&P 500 sectors in terms of market cap, representing more than one-fifth of the benchmark.