The vote for Brexit markedly lowered global growth and interest-rate expectations. As a result, company managements for US financials focused on cost-cutting and strengthening their balance sheets. We believe US financials are the cheapest sector and growing the fastest. During the third-quarter earnings season, some 76% of S&P 500 companies beat earnings estimates by around 5.6%, Financials beat estimates by 8%. Additionally, the third quarter was the first in over a year to show year-over-year EPS growth for the S&P 500, largely due the impressive 13% growth in financials.
President-elect Donald Trump could add additional fuel to the fire. If he deregulates the financials sector, it could remove a massive growth overhang. Expansionary policies, like increased fiscal spending, could also encourage rate increases. Financials are largely domestic and could benefit most from corporate tax reform, with estimates that a 20% federal corporate tax rate would drive earnings higher by approximately 18% on average. After undue punishment since the financial crisis, headwinds are turning to tailwinds, and we believe US financials are fundamentally stronger, undervalued and poised for a comeback.
John Bailer – The Boston Company, a BNY Mellon company