Financial stocks look set to resume their gains in February, following a month in which two of the largest U.S. banks, JPMorgan Chase (JPM - Get Report) and Goldman Sachs (GS - Get Report) , helped drive the Dow Jones Industrial Average to record highs.
Those banks and their competitors are getting a boost from President Donald Trump's promises to reduce corporate taxes, scale back regulation and boost government spending, while also benefiting from higher interest rates and a fourth-quarter surge in fixed-income trading.
While valuations "are starting to get a little stretched," said Cathy Seifert, a CFRA Research analyst, "there is an expectation of additional growth ahead, aided by the Fed and also aided by a more pro-business regulatory climate."
The Federal Reserve, whose monetary policy committee is scheduled to conclude a two-day meeting on Wednesday approved its second 25-basis-point hike in short-term rates since the financial crisis in December. The central bank will release the minutes of its most recent meeting on Feb. 22.
"We are going to parse the Fed minutes," Fred Cannon, Keefe, Bruyette & Woods research director, said in a phone interview. "If they start to seem like they're indicating that they really will do three moves this year, that would be a bullish signal, and if they back away, that would be bearish. Higher interest rates and more inflation, while it's generally not viewed as a good thing, it can be powerful for the earnings of banks and financials."
Investors will also be watching for Trump's appointment for the Federal Reserve vice chair of supervision, the Fed's key role for banking regulation, Cannon added. There are two open vacancies on the Fed's Board of Governors.
It's not only banks that stand to benefit. As February begins, investors are awaiting fourth-quarter reports from insurers, including American International Group (AIG - Get Report) , MetLife (MET - Get Report) and Prudential Financial (PRU - Get Report) , whose earnings have been pressured by years of low interest rates that affected returns on their investments.
"A rise in interest rates, a relatively healthy U.S. economy and an easing of some regulatory pressures (including a likely delay in the implementation of the Labor Department's fiduciary rule and the potential that the rule may be abolished) provide most life insurers with a power catalyst for relatively favorable growth and profit margin improvement," Seifert wrote in a note.
The question facing investors now is which stocks are best positioned to build on those gains.
Analysts at Keefe, Bruyette & Woods, a New York-based brokerage that specializes in the finance industry, have chosen nine they expect to lead the pack: Credit card-processor Visa (V - Get Report) , wealth management company Charles Schwab (SCHW - Get Report) , insurance provider AON (AON - Get Report) , global investment firm KKR (KKR - Get Report) , bank holding company SVB Financial Group (SIVB - Get Report) , retirement firm Voya Financial (VOYA - Get Report) , real estate investment trust Colony Starwood Homes (SFR) , personal insurance company National General Holdings (NGHC - Get Report) , and savings and loan company Meta Financial Group (CASH - Get Report) . KBW analysts expect global real estate service firm Stewart Information Service (STC - Get Report) to underperform, but still consider it a best idea for 2017.
"The key themes that will drive financial stock performance in 2017 are both global and also national," said Cannon, who led a briefing with reporters in early January. Moderate economic growth, higher interest rates, increased trade friction and currency clashes are a few of the trends that stockholders should monitor, the firm's analysts said.
Following bank's quarterly earnings, Cannon said that KBW analysts have become bullish on Bank of America (BAC - Get Report) , which is the firm's top pick for large U.S. banks, while cautious on Citigroup (C - Get Report) based on recent trade discussions with Mexico.
"Since the U.S. elections last year, we have seen a global reflation trade with a view that the worst of deflation may be behind the developed economies as populist governments in the U.S. and elsewhere move to expand fiscal policy and restrict trade, both of which can drive higher inflation," Cannon said.
Other macroeconomic events to monitor, starting in February and leading into the spring, are the existing and new home sales numbers, Seifert notes, as home buyers may want to jump into the mortgage market before interest rates rise.
"The health of the spring home-buying season certainly impacts the banks; to a degree, the insurers, and the overall macro picture," she added.
The KBW Bank Index, which tracks the performance of leading banks, climbed over 21% since the presidential election, even after a 0.4% drop so far this year. Investors may benefit from looser regulation of smaller banks, industry analysts say, even if Congress proves less willing to ease restrictions on the biggest U.S. financial institutions.
More information on TheStreet's guide to trading in the month of February can be found here: