Financial stocks are in a sweet spot. Lower short-term interest rates, an expanding economy and some spectacular third-quarter results all helped to buoy shares in businesses that provide financial products or services in late 2024. The outcome of the U.S. presidential election boosted the shares even more; Wall Street has high hopes that the Trump administration will be bank-friendly.
All told, over the past 12 months, financial shares surged 31%. That beat the 25% return in the S&P 500 index, as well as the gains in every other sector except communications services (up 40%) and information technology (up 37%). When the final results of 2024 are in, if analysts are on target, the financial sector will have posted a nearly 15% jump in earnings from 2023, more than the 10% hop in earnings expected for the S&P 500.
Will the party continue in 2025? Analysts expect financial companies to post 7% to 9% growth in earnings in 2025 compared with 2024. That’s “still supportive growth for financials,” says Matthew Bartolini, head of Americas ETF research at State Street Global Advisors, especially when you consider that the sector currently trades at a bigger discount to the broad market than it typically does.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The financial sector’s price-to-book ratio (book value is assets minus liabilities) — one measure of the value of these kinds of firms — is currently at a 52% discount to the S&P 500 price-to-book ratio, says Bartolini; the typical discount is 44%.
Financials have some big-picture pluses in their corner, too. The economy has likely avoided a recession, and that’s good for banks, a prominent chunk of the overall sector. Also, short-term rates are moving lower, and longer-dated rates are inching up, which means the yield curve — the plotted line of interest rates of Treasuries with varying maturities — is now less inverted than it has been in recent years.
If the Federal Reserve cuts short-term rates another 0.50 percentage point in 2025, as expected, the yield curve could steepen further, a profitable setup for banks, which typically borrow at short-term rates and lend at long-term rates, says Bartolini.
How to invest in financial stocks
The financials sector is broad and includes investment managers, banks, brokers, exchanges, fund companies and insurers, among others. But due to specific catalysts, certain industries, such as asset managers, investment banks, property and casualty insurers, and regional banks, boast better near-term prospects than other financials.
To see why we like these corners of the financial sector and to explore ways to cash in, read on. All returns and data are through December 31, unless otherwise noted.
Asset managers
Strong stock returns and healthy inflows of new cash have fueled this category recently, lifting total assets under management. More growth is ahead as an increasing number of investors nearing retirement opt to get professional help to achieve their financial goals. Industrywide, assets under management are expected to grow 34% a year until 2032, according to PwC, an accounting and professional services company. Firms that have a good handle on technology and a solid footprint in the expanding markets of alternative assets and private equity and debt will have an edge in the money grab.
That’s where BlackRock (BLK, $1,025) fits in. Its popular exchange-traded funds, used widely by retail and institutional investors, are driving growth in assets under management, which hit $11.5 trillion at the end of the third quarter.
On top of that, BlackRock has Aladdin, a technology platform that financial firms around the world use to analyze risk, manage portfolios and make investment decisions. It “widens the moat around BlackRock, provides a diversified revenue stream and gives the firm a competitive edge over other plain-vanilla asset managers,” says CFRA Research analyst Catherine Seifert.
Meanwhile, BlackRock has been buying other businesses to beef up its share of private markets and alternative assets. Recently, it announced an acquisition of HPS Investment Partners, a leading private-credit shop, and closed on its purchase of Global Infrastructure Partners, an alternative assets fund.
As the world’s largest asset manager, BlackRock could trade at a hefty premium to the typical investment management firm stock. But it doesn’t. At $1,025, the stock’s price-earnings ratio of 21 is just a tad above the P/E of 18 of the typical asset management firm.
Investment banks
Lower interest rates will spur initial public offerings in the stock market and mergers and acquisitions among corporations, transactions that have been in a bit of holding pattern of late. Some market gurus think the Trump administration may end certain regulations that helped slow the pace of deal closings in recent years.
But it’s tricky to peg investment decisions on what a new administration might do, which is why we still like Goldman Sachs (GS, $573), a stock we've previously recommended in Best Stocks to Buy Now. Its business is already humming. The firm crushed analysts’ expectations in 2024’s third quarter, with double-digit revenue growth in nearly all of its business segments, including a 46% jump in debt underwriting and 20% growth in investment banking fees. At $573, Goldman shares trade at 13 times expected earnings for the year ahead, basically in line with the average investment banking company P/E of nearly 14. Meanwhile, analysts expect 18% annualized earnings growth over each of the next three years.
Property and casualty insurers
Demand for property and casualty insurance is rising. Natural disasters are increasingly destructive — the 2024 hurricane season may have been among the costliest ever. Businesses of all kinds face a heightened need to protect against threats to intellectual property and cybersecurity. And jury awards of $10 million or more, called “nuclear verdicts” in the industry, have become commonplace, boosting demand for protection against them.
Catastrophes and losses are, on the whole, good for insurers’ bottom line. Though claim payouts tend to trim profits, insurers can simply raise premiums. In the property-casualty insurance industry, this price-hiking scenario is called a “hard cycle” because it’s hard for consumers and businesses to find insurance at attractive prices. But for investors, it means the insurance business is on the upswing.
W.R. Berkley (WRB, $59) is led by founder William R. Berkley, which we view as a big plus. The company offers a variety of insurance products for construction companies, financial institutions, hospitals and retailers, among others. Analysts expect 8% revenue growth and 7% earnings growth in 2025. Though shares have climbed 27% over the past 12 months, the stock trades at 14 times earnings, below its five-year median P/E of 17. That’s a discount compared with peers, too, which trade at a P/E of 27.
Argus Research analyst Kevin Heal says W.R. Berkley’s strong position in the property-casualty market is reflected in revenues and earnings that are growing faster than at peer insurers.
Another way to play the upturn in the property-casualty insurance cycle is through insurance brokerage firm Willis Towers Watson (WTW, $313). Since its planned merger with Aon was aborted in 2021, the company has struggled to be competitive in its core insurance brokerage business (41% of revenues), and total revenue growth was anemic in 2022.
But there are signs that the company’s cost-cutting and restructuring efforts are starting to have an effect, and that could lift shares higher. Though Truist Securities analyst Mark Hughes expects a slight tick down in overall revenues in 2025 compared with 2024, profit margins are expanding, and the company could deliver a 5% jump in earnings. Emerging interest in cybersecurity coverage could provide another boost to the business’s results.
In December, Hughes set a $380 price target on shares, a 21% increase from recent levels. The stock trades at a P/E of 17, a discount to the multiple of the typical insurance-broker stock.
Regional banks
Regional bank stocks tanked in 2023 after Silicon Valley Bank, among others, failed. But things are looking better. Lower interest rates have helped; regional banks tend to depend on net interest margin — the difference between how much the bank earns on the loans it issues and how much it pays on customer deposits — to drive earnings.
A healthy economy and low unemployment are also boosters. “The number-one driver of bank performance is low unemployment,” says CFRA Research analyst Alexander Yokum. Finally, regional banks are better capitalized these days. After Silicon Valley Bank collapsed, many regional banks built up their cash reserves, fearing that capital requirements — the amount of cash that regulators require a bank to have on hand — might increase.
Shares in Bank OZK (OZK, $43), formerly Bank of the Ozarks, are downright cheap. (The Ozarks encompass Missouri, Arkansas, Oklahoma and a small patch of Kansas). The stock trades at less than seven times earnings, a 36% discount to peers. “We think its discount to peers is too big,” says John Buckingham, editor of The Prudent Speculator.
The stock, down 7% over the past 12 months, has lagged its peers partly because investors are worried about the bank’s commercial real estate exposure given the work-from-home trend — regional banks tend to be loaded with such loans, so it’s a primary concern in this sub-industry. But workers are starting to return to the office, and besides, Bank OZK tends to be conservative, says Buckingham. It partners with strong developers and incorporates defensive loan structures, among other things, to embed a measure of safety into its loans.
PNC Financial Services (PNC, $193) is the biggest regional bank, serving some fast-growing states, including the Carolinas and Texas, among others. Its heft makes it a more stable stock than other regional banks. What’s more, PNC is ably managed. “Bill Demchak, the CEO, tends to make the right decision every time,” says Yokum.
PNC wasn’t loaded up on long-term bonds in 2022, for instance, when they lost value after the Federal Reserve raised rates (bond prices and yields move in opposite directions), a strategy that led to the failure of Silicon Valley Bank and caused trouble for a few others. PNC also trimmed its commercial office real estate exposure by 16% over the past year, to just 2.2% of total loans.
A big minus is that PNC’s shares soared in 2024. But a late-year breather now puts the stock up 29% over the past 12 months. The stock currently trades at 13 times earnings, in line with the P/E of the average regional bank stock.
Financial picks for fund investors
If you want to beef up exposure to the broad financial sector, consider an index-based diversified financials exchange-traded fund, such as iShares U.S. Financials ETF (IYF, $111) or Financial Select Sector SPDR ETF (XLF, $48). Or you could go with an actively-managed mutual fund, such as Fidelity Select Financials Portfolio (FIDSX) or T. Rowe Price Financial Services (PRISX).
Certain industry ETFs, however, allow you to home in on the more promising sections of the financial sector.
Invesco KBW Property & Casualty Insurance ETF (KBWP, $116), for instance, tracks an index of 24 stocks, including the Travelers Companies, Allstate and Chubb. Its five-year 12.7% annualized record beat 80% of its financial-fund peers.
For regional banks, we like iShares U.S. Regional Banks (IAT, $50). It holds 34 stocks weighted by market value. PNC Financial Services, U.S. Bancorp and Truist Financial are top holdings. Over the past 12 months, the fund has gained 24%.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
Related content
-
I'm want to give my 3 grandkids $5K each for Christmas.You're comfortably retired and want to give your grandkids a big Christmas check, but their parents are worried they might spend it all. We ask the pros for help.
-
If You're Not Doing Roth Conversions, You Need to Read ThisRoth conversions and other Roth strategies can be complex, but don't dismiss these tax planning tools outright. They could really work for you and your heirs.
-
Could Traditional Retirement Expectations Be Killing Us?A retirement psychologist makes the case: A fulfilling retirement begins with a blueprint for living, rather than simply the accumulation of a large nest egg.
-
I'm a Financial Planner: If You're Not Doing Roth Conversions, You Need to Read This
Roth conversions and other Roth strategies can be complex, but don't dismiss these tax planning tools outright. They could really work for you and your heirs.
-
Could Traditional Retirement Expectations Be Killing Us? A Retirement Psychologist Makes the Case
A retirement psychologist makes the case: A fulfilling retirement begins with a blueprint for living, rather than simply the accumulation of a large nest egg.
-
I'm a Financial Adviser: This Is How You Can Adapt to Social Security UncertaintyRather than letting the unknowns make you anxious, focus on building a flexible income strategy that can adapt to possible future Social Security changes.
-
I'm a Financial Planner for Millionaires: Here's How to Give Your Kids Cash Gifts Without Triggering IRS PaperworkMost people can gift large sums without paying tax or filing a return, especially by structuring gifts across two tax years or splitting gifts with a spouse.
-
'Boomer Candy' Investments Might Seem Sweet, But They Can Have a Sour AftertasteProducts such as index annuities, structured notes and buffered ETFs might seem appealing, but sometimes they can rob you of flexibility and trap your capital.
-
AI Stocks Lead Nasdaq's 398-Point Nosedive: Stock Market TodayThe major stock market indexes do not yet reflect the bullish tendencies of sector rotation and broadening participation.
-
Got $100 to Gamble? These Penny Stocks Could Be Worth the RideVolatile penny stocks are high-risk plays with potentially high rewards. If you have $100 you can afford to lose, these three names are worth a look.
-
Quick Question: Are You Planning for a 20-Year Retirement or a 30-Year Retirement?You probably should be planning for a much longer retirement than you are. To avoid running out of retirement savings, you really need to make a plan.
