When you buy financial stocks, you’re investing in the world’s leading providers of banking services, insurance, credit cards and a wide range of other financial services. Best Financial Stocks
Because the financial sector forms the core of the global economy, investors should strongly consider making financial stocks an important part of their portfolios.
Rising interest rates are often good news for bank stocks, helping expand their net interest margins. Higher interest rates can also boost insurance companies’ profits on the safe debt they hold.
However, banks and other financial stocks holding long-term debt investments have run into problems in 2023 amid bond market weakness.
In addition, investors are concerned that the Federal Reserve will be unable to bring down inflation without triggering a U.S. recession, which is bad news for bank loan growth and most of the financial sector.
Understanding Financial Stocks
Financial sector stocks belong to companies that offer investment banking, consumer banking, lending, insurance or credit card services. While banks are a big part of the story, they’re hardly the only sort of companies active in this key stock market sector. The financial sector also includes insurance companies, investment firms, financial tech (fintech) startups and service providers for the industry. Some of the key categories in this sector include:
- Banking. Banks form the foundation of the financial sector, providing deposit accounts and loans to businesses and consumers. There are commercial banks, which mainly work with individuals and small businesses; investment banks, which work with large institutions and high-net-worth investors; and banks that do both.
- Insurance. Insurers sell and manage various types of insurance policies, like health, life, property and liability.
- Financial services. Companies that provide services like credit cards, investment management and accounting are considered financial services firms. This also includes support services for the sector, like credit bureaus and bond ratings agencies.
- Fintech. Fintech covers companies working on new technologies for the financial sector, such as innovative payments companies and firms that develop cryptocurrency technology.
Advantages of Financial Stocks
Solid long-term performance. Over the past 30 years, the financial sector’s earnings have grown significantly faster than the economy as a whole, allowing financial companies to pay above average dividends to their shareholders and creating solid price-to-earnings ratios. While past performance is no guarantee of future success, it can be helpful to look backward when gauging investment opportunities.
More regulated after the Great Recession. The financial crisis of 2008 exposed problems in the financial sector that governments around the world have worked to address with regulation. Today, financial firms are required to take more measures to avoid trouble, like holding higher minimum capital levels to protect against losses. This reduces their risk compared to the sector in the past.
Chance for government support in recessions. The health of the financial sector has a direct bearing on the health of the global economy. As a result, financial firms can count on special support during a recession or a financial crisis. When banks ran into financial trouble during the Great Recession, for instance, governments bailed many of them out.
Benefit from rising interest rates. Today, interest rates are near historic lows. When they go up, however, banks, credit card companies and other lenders could increase their earnings by charging higher rates. Insurance companies can also earn more from their fixed income investments as bond interest rates go up.
Innovation from fintech. Financial sector stocks have benefitted from innovations like blockchain, mobile payment apps and robo-advisors, laying the groundwork for more sector growth.
Risks of Financial Stocks
Cyclical performance during recessions. Financial stocks are cyclical and sensitive to economic downturns. When people and businesses are struggling, they take out fewer loans, invest less and spend less on their credit cards, reducing revenue for financial companies. Not to mention, they may stop making payments on their existing loans.
Loan defaults can strain balance sheets. If a person or business cannot pay back their loan and defaults, the lender ends up writing off the debt. While this is part of a financial company’s regular business model, should things go really bad, defaults can spiral and put an otherwise solid company into bankruptcy, like when the housing bubble popped and turned into the 2008 financial crisis.
Disruption from technology. While the fintech innovations are exciting for new up and comers, they could disrupt established banks and other financial companies, adding an extra risk for their long-term prospects.
Government regulation can reduce profits. The financial sector is heavily regulated, and it’s possible for the government to take further action, like requiring banks to increase their capital reserves even more. While these actions make the sector safer, it hurts their profits because this is extra money they can’t lend out or invest.
How to Buy Financial Stocks
If you already have a taxable brokerage account or a tax-advantaged retirement account, like an individual retirement account (IRA), buying financial stocks is easy. But if you don’t have an IRA or a brokerage account, check out Forbes Advisor’s list of the best online brokerages.
Before you buy, research the financial sector and get familiar with ins and outs of this key industry. Keep in mind that individual stock picking is a risky business. Returns are not guaranteed, and the performance of individual stocks can be highly volatile—even among the biggest companies in the financial sector.
Here is a Best Financial Stocks
Visa Inc. (V)
Visa is one of the world’s largest credit card companies and electronic payment platforms. Amid broad financial sector weakness, Visa’s stock is up 10.4% in 2023 through April 27 on a total return basis, which includes dividends – the best performance on this list.
Analyst David Holt says Visa’s diversified business model is insulated from cyclical fluctuations in consumer trends or the macroeconomic background. In fact, he says Visa’s exposure to different payment categories will allow the company to maintain sustainable revenue and earnings growth.
In addition, Holt says Visa’s scale will help it generate high returns on capital. CFRA has a “buy” rating and $263 price target for V stock, which closed at $229.01 on April 27.
JPMorgan Chase & Co. (JPM)
JPMorgan Chase is one of the largest global banks and financial services companies, with roughly $3.7 trillion in assets. Analyst Kenneth Leon says JPMorgan has an opportunity to gain wallet share in the event of a shallow U.S. recession in 2023 and could benefit from a rebound in asset and wealth management in 2024.
In addition, Leon says investments in banking technology and applications should help boost growth and customer retention. JPMorgan’s first-quarter return on common equity of 18% was best in class among large U.S. banks. CFRA has a “buy” rating and $160 price target for JPM stock, which closed at $137.05 on April 27.
Mastercard Inc. (MA)
Mastercard is one of the world’s largest credit card and payments providers. Holt says Mastercard is an excellent defensive investment in an uncertain economic environment.
In addition, he says the company has made progress in expanding into tech-heavy trends, such as remittances, commercial point of sales and virtual cards.
Holt says Mastercard’s capital-light business model creates opportunities for operating leverage and above-average earnings growth. Finally, he says the global shift from cash and checks to digital payments will be a long-term growth catalyst for Mastercard. CFRA has a “buy” rating and $415 price target for MA stock, which closed at $373.67 on April 27.
Bank of America Corp. (BAC)
Bank of America is one of the largest diversified U.S. banks and financial holding companies. The stock is down 12.2% year to date, the worst performer on this list.
Leon says investors should buy the dip given nearly 90% of interest rate sensitivity to Bank of America loans is driven by short-term rates. Leon is bullish on Bank of America’s leading retail deposit market share among consumer and small businesses.
The bank also has a leadership position in wealth management thanks to its Merrill Edge platform. CFRA has a “buy” rating and $41 price target for BAC stock, which closed at $28.89 on April 27.
Wells Fargo & Co. (WFC)
Wells Fargo is one of the largest U.S. banks and has a mostly U.S. lending footprint. Leon says Wells Fargo is well positioned for profitable growth, and the stock has been gaining earnings momentum.
Wells Fargo has improved operating efficiencies, which help it increase net interest income. Leon says the bank’s portfolio of commercial loans to small and midsize businesses is performing well, and its overall business is stable. An end to the Federal Reserve’s asset cap could be a bullish catalyst at some point as well.
CFRA has a “buy” rating and $50 price target for WFC stock, which closed at $39.66 on April 27.
Morgan Stanley (MS)
Morgan Stanley is one of the largest U.S. investment banks. The stock also pays a 3.5% dividend, highest on this list.
Leon says Morgan Stanley has negligible exposure to unrealized losses on assets held to maturity, and he expects the bank to gain wallet share over the next 18 months. He anticipates equity and debt capital markets will soon recover and says the merger and acquisition pipeline is already starting to improve.
Leon says Morgan Stanley’s diversified asset and wealth management business creates significant shareholder value. CFRA has a “strong buy” rating and $105 price target for MS stock, which closed at $90.26 on April 27.
American Express Co. (AXP)
American Express is a financial services company that specializes in credit cards, digital payments and travel services. Analyst Alexander Yokum says American Express should generate more than 30% earnings growth over the next two years while its major competitors all experience earnings contractions.
Yokum says healthy spending growth, expanding card fees and moderation of marketing expenses will boost earnings. In addition, he says American Express’ low loan-loss provisions, just 6% of total revenue, are a reflection of its insulation from credit risk. CFRA has a “strong buy” rating and $215 price target for AXP stock, which closed at $158.45 on April 27.
S&P Global Inc. (SPGI)
S&P Global provides credit ratings services and data analytics. It also operates S&P Dow Jones, which manages the S&P 500, the Dow Jones Industrial Average and other popular benchmark indexes.
Yokum says S&P’s ratings business bottomed in late 2022 and will recover over the next two years. In addition, he says the company should benefit from a more stable interest rate environment and less economic uncertainty.
Yokum says investors do not fully appreciate the financial stability the IHS Markit acquisition will provide. CFRA has a “buy” rating and $425 price target for SPGI stock, which closed at $355.58 on April 27.
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