The sector, which had a volatile last year, showed consistent gains in the first three months of 2024 to become the top gainer among the 11 S&P500 sectors.
In Q1 2023, the sector was down 6%. One of the major financial market events of 2023 was the collapse of numerous small banks. The market witnessed five bank failures throughout the year, the last occurring in November with the fall of Citizens Bank.
Industries Q1 Performance
The sector, which saw stability at the end of last year with the Federal Reserve holding rates steady, has seen the momentum continue, as the Fed continues to keep rates unchanged and also reaffirmed its intention to have three interest rate cuts in the year.
Banks rose 13.12%, while Financial Services gained 9.86%, and Insurance up 15.23% in Q1.
U.S. stock fund flows into and out of the financials sector have swung from week to week. The financials-focused ETF had a net inflow of $178.4M as of March 28.
Last week, the sector also saw the biggest inflows of weekly net buying since August 2021, according to a BofA Securities Equity Client Flow Trends report.
What Are Top 5 movers in Q1
Gainers
- The Progressive (PGR) +27.96%
- The Hartford Financial Services (HIG) +26.60%
- W. R. Berkley (WRB) +22.58%
- Arch Capital (ACGL) +22.36%
- Allstate (ALL) +20.30%
Losers
- MarketAxess (MKTX) -23.46%
- Invesco (IVZ) -6.54%
- Franklin Resources (BEN) -4.03%
- Globe Life (GL) -4.66%
- FactSet Research Systems (FDS) -1.80%
What Analysts Expect
Morgan Stanley analysts said that financial sector (XLF) is seeing continued rebounding in capital markets activity, mergers and acquisitions, equity capital markets, and debt capital markets as a percent of nominal GDP near three-decade lows.
“Our team believes that the money center banks are a way to play this view,” the analysts added, and named Bank of America (BAC), Citi (C), Goldman Sachs (GS), and JPMorgan (JPM) — all rated overweight.
SA analyst, Ricardo Fernandez said, while the upside and growth potential are mundane the shift away from banks to payment, services, and insurance is positive.
The Fund has a steady revenue growth forecast of 6% and is expected to have a 10% EPS growth, but banks are in the weak spot with declining EPS, Fernandez said, calling the financial sector as the grease of the modern economy as well as a growth multiplier.
“Risks presented by the banks and insurers are mitigated somewhat by the heavy presence of what used to be considered Information Technology companies in XLF’s index,” said another analyst Psycho Analyst.
The analyst added the ETF is likely to respond more strongly to reports of events impacting on banks, especially smaller, regional banks as the “average investor tends to think of banks when they think of XLF.”
What Quantitative Measures Say
XLF receives a Buy rating from SA quant system with 4.21 score. This comes in large part due to an D grade in the category of risk. The stock, however, received high grades in other areas, with an A for momentum, B for dividends, A+ liquidity and A for Expenses.
