The U.S. stock market rose an impressive 19% in 2017 as measured by the S&P 500 index. The financial sector performed even better, though, notching 30% returns thanks to an economy that continues to strengthen. With 2018 under way, some analysts think the overall market will have another good year, with financial services leading the way.
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Catalysts for growth
One such forecast issued by Credit Suisse (CS) is calling for another 8% rise in the S&P 500 in the new year as of end-of-2017 figures. The investment manager sees the economy continuing to trudge along with low risk of a recession, which could help financial companies.
That's just one estimate, and specific calls on where the market is heading shouldn't be given much weight, but the underlying assumptions are good news for banks and other financial services. Perhaps the biggest catalyst is a slowdown in government regulations. After the financial crisis in 2008, the federal government put new safeguards in place to prevent another economic collapse. A decade later, with a new Republican Congress and White House in control, the rollout of new regulations is slowing down. Without having to implement policies and procedures to comply with new rules, financial institutions could save large sums of money.
The Federal Reserve has also begun raising interest rates from near-zero over the last couple of years. While higher interest rates mean higher interest expenses on debt, banks get to charge higher interest on loans. As a result, many lenders saw revenue rise in 2017. With the Fed predicting that it will hike rates again in 2018, that could be another boon for banks.
Technology has also been helping the industry grow. Many companies in the growing "fintech" niche are innovating and changing the way the financial services industry works. Advances such as blockchain technology, new money transferring platforms, artificial intelligence, and online services are helping new firms grow their customer base and helping old firms save money.
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All of those factors add up to a strong tailwind for financial services in 2018. With the stage set for businesses and profits to expand, the financial sector looks like a good place to invest this year.
Banks, payment processing, and fintech stocks
One institution that stands to benefit is diversified banking giant JPMorgan Chase (JPM 0.56%). The improving economy has helped the firm make more fees from funds on deposit and its investment banking arm, and rising interest rates have helped increase the revenue of its lending portfolio. Revenue through its first three reported quarters of 2017 was up 4% year over year, leading to a 17% rise in earnings per share.
Management has issued a positive outlook ahead, and as long as the economy keeps chugging along, big banks should benefit, and JPMorgan Chase does not look like an exception. As the largest bank in the country, it isn't going to post explosive growth numbers. However, the company consistently posts solid results across all of its banking divisions and pays a dividend of 2%.
Shares of payment processing company PayPal (PYPL 2.84%) had a spectacular 2017, with shares rising 87% thanks to double-digit growth in the users and transactions on its platform. The company has been benefiting from fast-changing trends in how merchants charge customers and how consumers manage their money. The shares aren't for the thrifty, currently commanding a price-to-earnings ratio of 64.5. However, with the company's revenue expected to increase 20% in the year ahead and the bottom line expected to increase with it, PayPal's run could continue. More importantly, the trend toward electronic payments and online money transfers looks like a longer-term development that could provide further upside for the company well beyond the next 12 months. As a leader in the growing online payment industry, Paypal is in good position to benefit.
The Cboe Global Markets (CBOE -0.65%) family of investment exchanges also had a great 2017. The company's merger with former rival BATS last year helped expand the breadth and diversity of its offerings. The combination has also helped the new company save on costs: Operating margin rose more than 4% year over year in the last reported quarter.
A big boost, though, has come in the form of rising trading volumes. Options and futures for stocks and index funds have been gaining in popularity. If markets continue to march upward, that means more trading activity, and more trading activity means more revenue. The rise of index fund popularity is also a positive, as the company continues to add new offerings on its platform available for trade. That bodes well for Cboe's outlook in 2018.
A lot of factors could converge to change the outlook for financial-services companies, but steady economic growth, rising interest rates, and new technology look like they will underpin the sector's performance in the year ahead.
