Top Financial Stocks

The financial sector is composed of companies that offer services including loans, savings, insurance, payment services, and money management for individuals and firms. Financial sector stocks include companies involved in retail and commercial banking, accounting, insurance, asset management, credit cards, and brokerage. Well-known companies in the sector include Wells Fargo & Co., The Goldman Sachs Group Inc., and Morgan Stanley.

Financial stocks, represented by an exchange-traded fund (ETF)—the Financial Select Sector SPDR ETF (XLF)—fell 17% compared with the 16% drop in the Russell 1000’s over the past 12 months. These market performance numbers and all statistics in the tables below are as of Oct. 25, 2022.

Here are the top three financial stocks with the best value, the fastest growth, and the most momentum.

Best Value Financial Stocks

These are the financial stocks with the lowest 12-month trailing price-to-earnings (P/E) ratio. Because profits can be returned to shareholders in the form of dividends and buybacks, a low P/E ratio shows that you’re paying less for each dollar of profit generated.

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• Brighthouse Financial Inc.: Brighthouse Financial provides annuities and life insurance products throughout the United States.
• American International Group Inc.: American International Group, Inc. provides property casualty insurance, life insurance, retirement products, and other financial services to commercial and individual customers. On Sept. 14, AIG's life insurance and retirement division, Corebridge Financial Inc., raised $1.7 billion billion in an initial public offering. The AIG spinoff is partly owned by Blackstone Group.
• Equitable Holdings Inc.: Equitable Holdings is a financial services company specializing in annuity products such as life insurance and retirement funds. Another segment of the company focuses on investment strategies and research.

Fastest Growing Financial Stocks

These are the top financial stocks as ranked by a growth model that scores companies based on a 50/50 weighting of their most recent quarterly year-over-year (YOY) percentage revenue growth and most recent quarterly YOY earnings-per-share (EPS) growth. Both sales and earnings are critical factors in the success of a company. Therefore, ranking companies by only one growth metric makes a ranking susceptible to the accounting anomalies of that quarter (such as changes in tax law or restructuring costs) that may make one figure or the other unrepresentative of the business in general. Companies with quarterly EPS or revenue growth of more than 2,500% were excluded as outliers.

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• Equitable Holdings Inc.: See above for company description.
• Principal Financial Group Inc.: Principal Financial Group sells insurance products and retirement services to businesses and individual customers worldwide. The company said recently that its investment unit will operate under a new name, Principal Asset Management, as part of a strategy to focus on asset management. The unit had $507 billion in assets under management (AUM) as of June.
• Webster Financial Corp.: Webster Financial delivers financial, banking, and investment services to businesses, individuals and families. On Oct. 20, Webster reported that net income available to common shareholders surged by 145% year-over-year (YOY) on rising revenue in the third quarter. The growth was driven by higher interest rates and the company's January merger with Sterling Bancorp.

Financial Stocks with the Most Momentum

These are the financial stocks that had the highest total return over the past 12 months.

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• Unum Group: Unum Group provides insurance and financial protection benefits primarily in the U.S., U.K., and Poland, including disability, life, vision, dental and other services. The company will pay a quarterly dividend of $0.33 per common share on Nov. 18 to shareholders as of Oct. 28.
• First Horizon Corp: FHN Financial offers capital market services, regional banking, and wealth management. The company also provides investment services and balance sheet management. On Oct. 18, First Horizon reported that net income rose 14% on a 19% increase in total revenue. The earnings results were affected by costs related to its merger with IberiaBank Corp.
• LPL Financial Holdings Inc.: LPL Financial Holdings operates as a broker-dealer. It provides a brokerage and investment advisory services platform to financial advisors across the U.S. Additionally, LPL offers clearing and compliance, account management and rebalancing, annuities, exchange-traded products, and mutual funds.

The Impact of Interest Rates on Financial Stocks

Financial stocks typically benefit from rising interest rates through increased profit margins, heightened trading activity, and greater investment returns.

Increased Profit Margins: Rising interest rates allow banks to widen the net interest margin (NIM) between what they pay depositors and receive from borrowers. Moreover, rising rates usually indicate an expanding economy, meaning customers are less likely to default on loan payments. Not always, but often, rising interest rates translate into higher share prices for financial stocks. For example, the sector gained 20% in 2017, following the federal fund rate higher throughout that year.

Trading Activity: Financial institutions that offer securities trading, such as investment banks and brokers, often see trading activity increase when interest rates rise, resulting from positive investor sentiment. For example, during 2017's rate hikes, Charles Schwab Corporation (SCHW) subsidiary TD Ameritrade recorded a 10% year-over-year (YOY) increase in daily client trading volume. One exception to this rule of thumb occurred during the COVID-19 pandemic amid record-low interest rates. Brokerage firms enjoyed unprecedented trading volumes during this period as couped-up investors armed with government stimulus checks spent their time and money trading the stock market.   

Investment Returns: Rising rates also allow financial institutions to earn higher interest on their yielding assets. For instance, insurance companies enjoy greater profits during rate hike cycles because their underlying bond investments yield greater returns. Insurers typically hold lots of safe debt like fixed-interest securities to back their insurance policies.

Advantages of Financial Stocks

Two key advantages of financial stocks include regulation and exposure to investment banking.

Regulation: After the 2007-2008 global financial crisis, lawmakers passed the Dodd-Frank Wall Street Reform and Consumer Protection Act to overhaul the U.S. financial system. Banks must now maintain certain capital levels, while large banks must undergo an annual “stress test” to determine their ability to survive adverse downturns. These heightened regulations substantially lower the risk of investing in the financial sector.

Investment Banking: Investing in financial institutions that offer investment banking provides broad exposure to services that may outperform traditional lending during different stages of the economic cycle. For example, New York-based Goldman Sachs Group, Inc.’s (GS) investment banking division reported strong revenue in the second quarter of 2020 at the height of the pandemic, while retail banks grappled with sizeable loan loss provisions.

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