When you think of financial stocks, the first thing that comes to mind are banks, but there are various other companies within the sector that provide financial services, such as payment-processing, accounting, asset management, insurance and brokerage companies.
In this article, we are going to take a look at the current health of the sector, the future outlook, and walk you through some of the best financial stocks you can buy right now.
What Is the Current Health of the Financial Sector?
The financial services sector of the stock market, often considered dull and boring by many investors, has actually demonstrated an innate ability to adapt to levels of uncertainty not seen in over a decade.
There will be more volatility, a certainty spurred on by interest rate adjustments to come, potential geopolitical crises, and other unnamed forces. These will disrupt the relative stability that has been established after the pandemic.
How do banks and their financial service provider brethren survive such consequences? Cutting costs is not the only answer. Using technology and becoming more innovative will surely be part of the solution.
The S&P 500 sub-index for the financial sector presented above reflects the strong bounceback that has occurred, primarily driven by financial banks. Yes, there was a COVID-19 dip in early 2020, but price points in the index soon began to march up a gradually sloping trendline, which has slowed a bit, as with the general stock market malaise during most of 2022. That steady march to higher profitability began after the financial crisis in 2008/09, a remarkable recovery by any measure.
According to McKinsey, profits in the banking industry, after lagging and remaining flat for several years, hit a 14-year high in 2022. Global revenues increased by $345bn, with expected return on equity falling between 11.5% and 12.5% for the period. Every key measure seemed to grow from net margins to interest income. Measures for capital adequacy also topped high watermarks, setting a record for Tier-1 capital ratios of 14% to 15%.
Best Financial Stocks To Consider Right Now
- JP Morgan
- BofA
- Visa
- Mastercard
- Block
JPMorgan Chase & Co. (NYSE:JPM)
JPMorgan is a global financial services provider and has always been very popular with investors. This banking behemoth is focusing on the future as well as the present, as investments, especially in technology, will be necessary for long-term profitability. Its information officer has announced that the firm is now hiring 2,000 engineers after having hired 5,000 software developers and data scientists.
Bank of America Corporation (NYSE: BAC)
Another perennial favourite of investors in this sector is Bank of America (BofA). This global giant, like JPMorgan, has a long track record of turning things around when times are tough. In banking, quality does rise to the top. The bank has recently increased investment in minority-owned institutions by $100m.
Visa, Inc. (NYSE:V)
Visa tops our last trio of firms in the payment-processing business. Visa is not a bank, but it is responsible for the network that wires the world’s banking institutions together all the way down to the point-of-sale or to an ATM. It is a technology company and derives its revenues from payment transaction flows, which rise even during difficult times.
Mastercard, Inc. (NYSE:MA)
Although Mastercard is almost a carbon copy of Visa, but only half its size, this technology company has a reputation for tighter cost margins, especially in the marketing area. It has also benefited from a resurgence in cross-border travel and the fact that payment processors are often considered safe havens when economic uncertainty abounds.
Block, Inc. (NYSE: SQ)
Block, Inc, formerly known as Square, is an American financial services company whose founder and CEO is Jack Dorsey of Twitter fame. This NYSE listed firm is much smaller than Visa or Mastercard, but it provides the connections and technology for small businesses to accept card payments.
Do you want to make a play on a turnaround situation? Block’s stock is down more than 12% this year due to poor financial results. Analysts believe that it has achieved scale and could meet investor expectations by realizing its potential going forward. This one is risky, but has a potential high reward.
YOUR CAPITAL IS AT RISK
What Is the Outlook for This Sector Going Forward?
Not all banks across the globe are performing above average. Nearly half have profits less than their cost of equity, and the consequences vary from region to region. One high point of note is that banks in emerging markets are doing quite well. Unfortunately, the effects of COVID-19 and the crisis in Ukraine have not fully dissipated. They linger on, but these are not the only disruptive forces or shocks that this sector must endure and address in 2024.
The primary concern going forward is that as the economy weakens and gradually slows down, the differences between existing financial service providers regarding performance will be magnified. As interest rates rise, banks will benefit from higher margins, but these gains may not last for the long term. McKinsey believes that banks are facing a “long-term growth slowdown”, which will result in what its analysts term the “great divergence”.
What this means to you as an investor is that there will be winners and losers, and choosing your horses for the race will be more important than ever in this sector. The divergence will be geographic and will depend upon each institution’s operating model and how funding is secured. Banking shares will continue to trade at deep discounts, compared to fintech firms, for example, but this has always been the case due to slow growth and low profit expectations.
It is, however, not all gloom and doom in this sector. There will always be high performers that deliver the goods, but it will have more to do now with scale, geography, specialization, and customer segments and demographics. For example, many banks across Europe remain unprofitable. Large global banks will fare better, and infrastructure companies that focus on transaction processing will always be a good bet when the economy lags but shows signs of recovering. Payment companies are typically the first benefactors when economic shifts begin to go positive.
Accepting the challenges and the divergences that could take place in 2024, we have selected our five best financial stocks in this sector that we believe are worthy of your consideration. The list below consists of two large global banks and three payment-processing companies. These five high-quality entities have proven time and again that they can adapt and provide investors with the returns they expect.
What to Know About The Sector Before You Invest
Investing in financial stocks, or any type of stock for that matter, comes with risk. The stock market can be volatile, and depending on the company you choose and the market it’s in, the price can fluctuate enormously.
As mentioned at the beginning of this article, when most people think of financial stocks, they think of banks, and one thing to be aware of is that bank stocks are influenced by interest rate risk.
Banks will make profits from the interest paid on loans and mortgages, and so another point to consider when you are analysing bank stock is who they are loaning money to.
Finally, if you are investing in an investment company, make sure to consider the risk to its investments when analysing the stock.
It is essential to consider the bigger picture when investing – don’t just look to what’s happening now, but instead look at what could happen in the future and the prospects for the company going forward. Investing for the long term is recommended.
Of course, we can’t list all of the positive and negative aspects of an individual stock in one article. Still, we can assist in helping you to make profitable decisions when you decide to invest.
