Diversified Financial Services
Banks have had an amazing run, and while such strong performance is unlikely to repeat, there is still oomph left in the trade thanks to a more favorable regulatory environment, stronger demand for loans, a steeper yield curve, and a strong pipeline of capital market activity. Key risks are further tightening of monetary policy and an increase in bad loans. We reiterate our overweight on Capital Markets, Diversified Banks, and Regional Banks.
This is the time of the year when strategists are busy sending out their annual outlooks. Here on the Global Investment Strategy team, we decided to go one step further. Rather than pontificating about what could happen in 2025, we decided to harness the power of the multiverse to tell you what did happen (in at least one highly representative timeline).
Next week, please join me for a Webcast on Tuesday, December 17 at 10:30 AM EST (3:30 PM GMT, 4:30 PM CET) to discuss the economy and financial markets.
And with that, I will sign off for the year. I wish you and your loved ones a very happy and healthy 2025. We will be back in the first week of January with our MacroQuant Model Update.
Q1 earnings results of the largest US banks have demonstrated that the engine of recent growth in profitability, NII, has faltered as funding costs are rising fast. However, the resurgence in non-NII thanks to a revival in corporate activity has been a saving grace. Earnings growth appears to have bottomed, while valuations are attractive. To play up portfolio exposure to an upcoming surge in capital markets activity, and minimize exposure to declining profitability in traditional banking services, overweight Diversified Banks and Capital Markets, and underweight Regional Banks.
Positive economic surprises have delayed the onset of recession in the United States. But tighter monetary and fiscal policy, slowing global growth, and a looming rebound in policy uncertainty and geopolitical risk suggest that investors should buy insurance while it is cheap.
Banks face many challenges from a slower economy and tighter financial conditions, which offset benefits from rising rates and higher net interest income. It is likely that things will get worse, a sentiment supported by many banking executives. However, negative expectations have already been priced in. We will maintain our overweight for now but will fade this position after a bounce in the next bear market rally. The long-term outlook is negative. We prefer Regional Banks to Diversified Banks.