Investor expectations for the Federal Reserve to embark on a new era of monetary tightening as early as this month could lift bank stocks to new highs, according to RBC Capital Markets, which reiterated a buy rating on the sector. Since the U.S. presidential election on Nov. 8, the financial sector has rallied 24 percent compared with a gain of 11 percent for the S & P 500 index as investors anticipate a favorable business environment for the group under President Donald Trump . "Over the past several years, Financials have experienced numerous headwinds including lower rates, legacy litigation expenses, rising regulatory burdens, and falling levels of capital markets activity. However, each of these appears to be easing," wrote Jonathan Golub, RBC's chief equity strategist. In a research note distributed to clients Monday, Golub reiterated his overweight rating on financials, which was originally issued in November 2016. "Despite the strong run in Financials, the group remains attractive on nearly every fundamental measure," he wrote. Over the past several months, the strategist says analysts have been revising their earnings estimates for financials, predicting strong earnings growth as business trends to continue to improve. "Consensus estimates point to well above-average earnings growth, while valuations remain among the most attractive in the market despite re-rating higher by 2 turns. Further, Financials have seen among the strongest revisions to both top- and bottom-line estimates since Election Day," he said. On a price-per-earnings basis, Golub says financial stocks remain inexpensive when compared with the rest of the market, as shown in the chart below. Along with the upside momentum in interest rates, Golub says deregulation in the industry under the new Trump administration and improvements in the credit market could support the move in financials. In regard to credit conditions, RBC points to an all-time low in delinquencies and write-offs, and the likelihood for loan reacceleration to take place due to pro-growth policies under Trump. "The overall backdrop for credit remains quite healthy, or as JPM CEO Jamie Dimon put it, 'literally, look at the numbers: it's never been better. Ever ever ever,'" Golub said.
