This year is setting up to be a good one for financial stocks, according to Fidelity’s director of quantitative market strategy, Denise Chisholm. While financials — many of which pay solid dividends — have performed well in recent months, they are still considered relatively cheap, Chisholm said. The SPDR S & P Bank ETF (KBE), which tracks a range of financial institutions, gained 20.5% in 2024 and the SPDR S & P Regional Banking ETF (KRE) added 15%. In comparison, the S & P 500 rose 23% last year. KBE 1Y mountain SPDR S & P Bank ETF In addition, earnings growth is starting to turn up, she said. “Historically speaking, that’s when you want to be interested in financials, when they’ve basically under-earned and are now starting to better themselves on an earnings-growth trajectory,” Chisholm said. She also thinks it is a good place for dividend investors. While utilities may have higher yields, they have outperformed — and have lower odds of doing so going forward, she said. Meanwhile, financials pay dividends and have attractive valuations, Chisholm noted. “You’re going to get the total return bump,” she said. The KBE has a 30-day SEC yield of 2.37%, while the KRE has 2.65% 30-day SEC yield. Both have an expense ratio of 0.35%. KRE 1Y mountain SPDR S & P Regional Banking ETF There are also two unique situations in the space right now, Chisholm said. For one, valuation spreads have become very wide, she noted. “When investors sell anything they think is risky — like … [a] mid- or small-cap bank that might go under — and buy anything they think is safe — [a] diversified bank like JPMorgan or even a capital markets company — … you see that valuation spread gap out,” she said. “The wider that is, the more likely it is that the financial sector outperforms.” In the meantime, all the concerns facing the industry are already priced in, she said. In addition, the combination of interest rates and credit spreads is something the sector hasn’t seen in decades, she argued. Financials can outperform or underperform regardless of the rate environment —what matters is what rates are doing combined with credit spreads, she said. “To the extent that credit spreads are tightening, which they are, and interest rates are coming down, that’s the sweet spot,” Chisholm said. “There’s potentially more durable alpha,” she added. “We haven’t seen that combination in the better part of 20 years.”
