Source: Jin10 Data

The earnings season starting this week will be led by $PepsiCo (PEP.US)$ and $Delta Air Lines (DAL.US)$which starts on July 11, followed by several major banks on July 12, including $JPMorgan (JPM.US)$, $Wells Fargo & Co (WFC.US)$, $Citigroup (C.US)$ and $Bank of New York Mellon (BK.US)$According to FactSet's estimates, analysts expect earnings growth of 8.8% for the S&P 500 index in the second quarter, but financial stocks are only expected to grow by 4.3%.

Of course, investors are more concerned about the future and will focus on the situation of consumer and commercial loan demand in the face of long-term high interest rates and stubborn inflation. There are some encouraging signs. Analysts predict that profits in the financial sector will soar by more than 40% in the fourth quarter and achieve healthy growth in the first half of 2025.

"Financial stocks are starting to look more attractive," said Michael Cuggino, president of the Permanent Portfolio Family of Funds. But he said investors should be cautious and look for companies that generate substantial revenue from fee-based businesses, not just loan spread income. "Financial stocks are interesting, but you need to be a little more careful," he said. "I like companies with more diversified business portfolios." He pointed out that he holds Morgan Stanley (MS.N), Charles Schwab (SCHW.N), Visa (V.N), and State Street.

"Financial stocks are very interesting, but you need to be a little cautious," he said. "I like companies with more diversified business portfolios," he noted that he holds $Morgan Stanley (MS.US)$, $Charles Schwab (SCHW.US)$, $Visa (V.US)$ and $State Street (STT.US)$.

Beaten-down regional banks may also be attractive due to concerns about the sharp decline in commercial real estate loan values. The SPDR S&P Regional Banking ETF fell 7% in 2024 with a P/E ratio of 11.6 times, while the P/E ratio of the Financials Select Sector SPDR ETF was 16 times. Although several regional banks went bankrupt in 2023--nearly bankrupt $New York Community Bancorp (NYCB.US)$still has a healthy balance sheet.

John Mowrey, Chief Investment Officer of NFJ Investment Group, believes that banks with good credit quality should perform well in markets with strong economies in the Southeast and other Sun Belt states. He holds super-regional banks $PNC Financial Services (PNC.US)$, $Truist Financial (TFC.US)$ and $U.S. Bancorp (USB.US)$, as well as smaller Texas bank $First Financial Bankshares (FFIN.US)$. "Regional loan risk exposure is important," Mowrey said. "These banks are linked to strong microeconomics across the United States."

So, how strong is the broader economy? The June employment report showed signs of softening in the labor market. Investors (and the Fed) will also closely watch June inflation data. If core consumer price index and producer price index data, excluding food and energy, continue to approach an annualized level of 3%, it would increase the possibility of interest rate cuts this year.

Cindy Beaulieu, chief investment officer of Conning North America, said the Fed may cut interest rates in December. Interest rate cuts may come earlier. After the June employment report was released, traders estimated a 75% probability of a rate cut at the Fed's September meeting. As investors wait for more clarity on inflation, stocks may be volatile in the coming months. But this could be a good thing.

"You have to be prepared for more volatility, but that could create a window to enter the market," Beaulieu said. "If the market pulls back, there may be a buying opportunity."

Perhaps this time the rally will finally extend beyond large-cap tech stocks to other areas.

Editor / jayden