Stocks in the financial sector have increased by 17% since Trump’s victory

Donald Trump will take the oath of office on January 20 and he’ll officially begin the work of leading U.S. policies for the next four years. Trump surprised pundits, critics, and observers to win the U.S. presidential elections against all odds. More surprising is that most of the gloomy forecasts that analysts predicted in the event of a Trump presidency didn’t materialize. The U.S. market didn’t crash; rather, major market indexes have gone on to record new highs.

Many analysts have predicted that Trump’s presidency will usher in a new season in the U.S equity markets. The prevailing expectation is that the defense, construction, financials, and for-profit education sectors will soar under Trump’s administration. The healthcare, information technology, and foreign manufacturing are some of the sectors likely to take a big hit under president Trump.

However, it is still a little too early to know if the forecasts will turn out to be right or wrong. Nonetheless, this piece looks at some of the reasons for the unexpected gloomy outlook surrounding bank stocks ahead of the earnings season.

Here’s the current state of things with bank stocks

Stocks in the financial sector have soared by 17% since Trump’s victory at the polls in Nov last year. Financial stocks hold the record as the top-performing sector in the S&P 500 in the last 9 weeks and investors generally expect the gains to continue. One of the reasons behind the positive outlook on financials is the expectation that Trump will relax some of the regulations that has stifled financials in the last couple of years.

Roger Watson, an analyst at Stern Options observes that “investors pumped in serious money into the financial sector in a strategic move to increase their exposure before Trump took the oath of office.” Market data showed that investors pumped as much as $7.5B into the SPDR Financial Select ETF (XLF) between November 8 and January 10.

In fact, gains in the financial sector have outpaced gains in the broad S&P 500 market index since the elections on Nov 8 as seen in the chart above. In the last nine weeks, the SPDR Financial Select ETF (XLF) representing the financial sector has gained 17.27% whereas the S&P 500 has only gained 6.45%.

However, the massive gains recorded in the financial sector in the last nine weeks suggests that investors might start booking gains now to take profits off the table ahead of the Q4 earnings season. For one, the stock of individual banking stocks have massive outperformed the broad equity market—an out-performance that has more footing in speculation than in strong fundamental and technical analysis.

The chart above shows the performance of some top banking stocks in relation to the financial sector and the broad S&P 500 market index in the last nine weeks. The out-performance of Goldman Sachs, JPMorgan, Citigroup and the broad financial sector massively beats the paltry 6.45% gains in the S&P 500.

Julian Emanuel, banking analyst at UBS echoes the same sentiment of an impending profit-taking selloff in a note to investors. In his words, “the sharp rally in financials since Donald Trump‘s election, buoyed by higher interest rates and a steepening yield curve, may be due for a tactical pause… Retail flow, especially into ETF products, remains positive, further supporting the idea that the sector could pull back, especially if earnings don’t surpass the ‘high expectations bar’ or if managements provide a less optimistic outlook for 2017.”