Financial stocks may be outperforming the broader market this year, but that's not good enough for Wells Fargo(WFC), which is downgrading its rating on the sector.
Financial companies in the S&P 500 are up about 2% year to date, beating out the broader market index by about 0.6 percentage point. The bank had expected stronger outperformance by now, but says the flattening in the Treasury yield curve, turmoil in emerging markets and reduced optimism over earnings have led to more modest gains.
"Our optimistic view of financials has simply become more mixed as of late," writes the bank, cutting its rating on the sector to market weight from overweight.
The bank in particular highlights the stubbornness of the yield curve as a pothole for financial institutions. Many had expected long-term interest rates to rise more steeply in relation to shorter-term rates—a "steeper" yield curve, in market parlance. That was expected to be a boon for financial companies, which make money on the difference between their long- and short-term investments.
That hasn’t happened. After leaping to more than 3% late last year, the 10-year Treasury yield is now hovering closer to 2.8%, leading to a "flatter" curve.
"At the beginning of the year, most forecasters (ourselves included) were forecasting a steeper yield curve in 2014, driven by a continuation of the sell-off in the longer end of the curve with the Fed’s tapering," writes the bank. "Yields have failed to comply thus far."
It still favors commercial finance and consumer banks, and holds an outperform view on a few stocks within the sector, including SunTrust Banks Inc. and Capital One Financial Corp.
"We will watch for renewed momentum in rates, as well as price and earnings momentum as the keys to our outlook for financials."
No comments:
Post a Comment