But with that in mind, here are some of the key factors and trends that are likely to shape the financial sector in 2026 and beyond:
- Technology/AI: Technology is changing rapidly, and the financial sector is undergoing a massive transformation. Banks and financial service companies can do more through mobile apps than ever before, and technology can be leveraged to help these businesses operate as efficiently as possible. Insurance companies are using AI technology to help underwrite policies and process claims in a fraction of the time it takes a human. AI and other technology changes are likely to have a major impact on the financial sector in the coming years.
- Interest rates: They can have a significant impact on financial sector stocks. For banks, interest rates affect both the rates they pay on deposits and the rates they charge for loans. The latter can have a significant impact on consumer demand for borrowing, which can rise or fall dramatically with interest rate trends. With insurance companies, money collected as premiums is generally invested in fixed-income instruments before it is paid out for claims. So, interest rate movements can have a significant impact on insurance companies' income.
Types of financial stocks
Several different types of companies make up the financial sector. Companies in the financial sector vary widely by function, size, growth potential, and other factors.
Financial stocks can be broken into several categories, including:
- Banks: As previously mentioned, bank stocks comprise the majority of the financial sector. These include commercial banks, such as Wells Fargo, as well as investment banks, like Goldman Sachs (GS +0.83%), which provide services to institutions and high-net-worth individuals. Some banks, like JPMorgan Chase, serve both commercial and institutional clients.
- Insurance: The second-largest sector within the financial industry is the insurance subsector. This includes property and casualty insurers, life and health insurers, specialty insurers, and insurance brokers. Berkshire Hathaway is the largest company in the insurance subsector, and this also includes pure-play insurers like MetLife (MET -0.88%).
- Financial services: Some companies provide services related to investing and the public markets without being classified as banks or insurers. The ratings agency S&P Global (SPGI +1.35%) and the futures exchange CME Group (CME -1.29%) are two examples of financial service providers.
- Mortgage REITs: Companies that own mortgages and other financial real estate instruments, known as mortgage real estate investment trusts (mREITs), are another group in the financial sector.
- Fintech: Financial technology, or fintech companies, are those that leverage technology to create new solutions for the financial industry. Visa, PayPal Holdings (PYPL +0.32%), and Block (XYZ +0.81%) (formerly known as Square) fit into this category.
Analyzing financial sector investments
Investors can evaluate financial industry investments by using both standard metrics, such as the price-to-earnings (P/E) ratio, and custom, sector-specific metrics. For the banking and insurance subsectors of the financial industry, there are some particularly important metrics for investors to consider.
These metrics are especially useful for analyzing bank stocks:
- Return on equity (ROE) and return on assets (ROA): Two of the most widely used metrics to express bank profitability, ROE and ROA are a company's annualized profits expressed as percentages of shareholders' equity and total assets, respectively. A 10% ROE and a 1% ROA are often considered to be the industry benchmarks.
- Net interest margin (NIM): Most banks earn the majority of their profits by simply loaning money and charging interest to customers. The difference between the average interest rate a bank receives and the average rate it pays, plus certain expenses, is known as its net interest margin.
- Efficiency ratio: A bank's efficiency ratio measures the amount of money the bank spends to generate revenue. For example, a 60% efficiency ratio means that a bank spends $60 to generate every $100 in revenue. Lower efficiency ratios are better.
- Net charge-off (NCO) ratio: Calculating this ratio can be useful for comparing asset quality among different institutions. The NCO ratio indicates the annualized percentage of a bank's loans that it ends up writing off as bad debt.
- Price-to-book (P/B) ratio: When valuing bank stocks, the price-to-book ratio can be just as useful as the P/E ratio. The P/B ratio is a company's stock price divided by its net asset value. The price-to-tangible book value (P/TBV) ratio may be even more useful than the P/B ratio because it excludes assets tough to value, such as brand names and goodwill.
