Wall Street is at war with traders over the future of bank stocks

Mel Gibson, upon hearing how Wall Street analysts are underrating bank stocks. ‘Braveheart’/Paramount Pictures

One of the equity market’s hottest industries isn’t feeling the love from Wall Street.

Bank stocks, which have surged an S&P 500-best 32% since the presidential election, are seeing a disproportionately low number of buy ratings from research analysts.

Only about 35% of bank stocks have a buy rating, while similarly outperforming areas like semiconductor and software companies are seeing roughly 60% of stocks get a bullish nod from analysts, according to data compiled by Strategas Research Partners.

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Despite buying momentum and strong fundamentals, bank stocks remain unloved by Wall Street research analysts. Strategas Research Partners

Buy ratings on bank stocks are particularly scarce when you consider all the elements working in the sector’s favour going forward. As the group most sensitive to bond yields, banks are best-positioned to benefit from any interest rate hikes implemented by the Federal Reserve.

Bank stocks are also seen benefiting from the looser regulatory environment that’s been proposed by President Donald Trump. In a recent client note, Goldman Sachs banks analyst Richard Ramsden forecasted that potential deregulation of the financial industry could “increase returns to shareholders and boost bank EPS by 11%.”

Further, with bank earnings season set to kick off on Friday, the group could get a boost from profit growth that’s expected to be among the best in the S&P 500. Banks will expand earnings by 7.2% in the period, better than any group outside of tech and energy, according to forecasts compiled by Bloomberg.

The scepticism being expressed by Wall Street analysts is also surprising when you look at how well financial firms have done across the board over the past month.

An equal-weighted gauge of financial stocks has climbed 5.9% since June 7, the best out of the 10 main S&P 500 industries by two full percentage points, Strategas data show.

On the other side of the ledger is the tech sector, which, when stripped of the market cap weighting that favours juggernauts like Apple and Amazon, has slipped 4% over the same period — underperformance that analysts appear willing to forgive.

But investors need not sit by idly. According to Strategas, the best way to play financial stocks right now is to take advantage of their underratedness and buy on weakness. Maybe then Wall Street will give credit where it’s due.

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Financial stocks have dominated on an equal-weight basis over the last month, while tech has faltered. Strategas Research Partners

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