Wall Street likes look of bank stocks

Wall Street is banking on financial shares moving higher in the New Year.

Banks and other financial firms have been in rally mode, jolted higher by policy developments that are seen as benefiting their bottom lines at the same time the finances of Main Street Americans are improving. The Financial Select Sector SPR Fund has rallied 5% the past three days and is up 18.8% this year.

Financial companies have been hobbled by stringent regulations and low interest rates — which create a drag on profits — in the years since the 2008 financial crisis. But now many of those shackles are being removed.

The Trump administration is moving to reduce the regulatory burden on the banking sector. The tax-cut bill Republicans are pushing to get passed by the end of the year would benefit banks’ bottom lines, as will gradual interest rate hikes from the Federal Reserve next year.

Wall Street research firm CFRA just upgraded its outlook on financials. Lindsey Bell, an investment strategist at the firm, says banks should benefit from a slow improvement in loan growth, as well as more rate increases under incoming Fed chair Jerome Powell.

Rising interest rates boost bank profits by increasing the difference between the interest income they generate from loans and the amount of interest they pay out to savings account holders.

Another bright sign: Analysts have been raising earnings outlooks for 2018. Growth is currently pegged at 15.2% next year, up from 13.4% on June 30.

Banks are also seen benefiting from a more healthy consumer, Bell noted.