Goldman Sachs makes bullish case for banks

Wall Street firm Goldman Sachs is betting on bank stocks posting better gains than the rest of the U.S. stock market, mainly because the firm believes fears of a U.S. recession are overblown.

David Kostin, the firm’s chief U.S. equity strategist, lays out a bullish call on bank stocks, saying his firm’s economists see only a 5% chance of recession in the next 12 months and less than 20% odds during the next eight quarters.

“An economic contraction in the near term seems remote,” he told clients in a research note, noting that confidence of consumers, who account for nearly 70% of U.S. economic growth, stands at a 20year high. Corporate America is also exhibiting strength, he adds, with spending on capital expenditures robust.

A few key trends are working in banks’ favor and will likely drive their stocks higher, Kostin said. Bank shares typically do better when interest rates are on the rise as they are now, with the

10-year Treasury note recently topping

3% for the first time since January 2014. Stockholders are also likely to see banks return more cash to them in June via dividends and stock buybacks, as the Federal Reserve is expected to give banks the green light to boost capital returns, Goldman analysts say.

Banks will also benefit from fee income from heavy M&A activity and a rebound in loan growth. Financial shares are also selling at cheaper valuations than the broad market.

Buy-rated stocks at Goldman with the biggest upside from its price targets include Capital One Financial, State Street, Bank of America and Citizens Financial Group.