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 third-quarter earnings season, 76% of S&P 500 companies beat earnings estimates. While the average beat was 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 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 would 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.
For more insight into what the next 12 months might hold for investors, please visit the BNY Mellon Markets 2017 special report.
John Bailer – The Boston company, a BNY Mellon company