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) and Goldman Sachs (GS) , 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) , MetLife (MET) and Prudential Financial (PRU) , 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.