Financial and technology stocks are expected to outperform the broader market in the second half of 2017, according to the latest U.S. Weekly Kickstart report from Goldman Sachs Group Inc. (GS)
After passing the recent CCAR stress tests administered by the Federal Reserve, major banks are poised to increase the capital returned to investors by almost $40 billion, or 43%, through a combination of dividend hikes and additional share repurchases, Goldman says. These actions will raise the financial sector's return on equity (ROE) and price-to-book value ratio (P/B), both of which then will have positive impacts on the prices of bank stocks. With tech stocks, the compelling fundamental story is rapid sales growth.
Technology companies are expected to deliver the fastest revenue growth rates of all sectors, which Goldman projects to be 9% for full-year 2017 and 7% in 2018, versus 5% in both years for the S&P 500 as a whole. Against a background of nominal GDP growth in the U.S. that Goldman forecasts at about 4% (2% real GDP growth plus 2% inflation), investors will gravitate to sectors like tech with secular growth prospects, Goldman notes. Meanwhile, Goldman projects that the S&P 500 will close 2017 at 2,400, down about 3% from today.
FAAMGs Lead Tech
Goldman is expecting the FAAMG stocks collectively to increase year-over-year sales in both 2017 and 2018 by 16%. Goldman's individual year-over-year sales growth projections for these stocks are, for 2017 and 2018, respectively: Facebook Inc. (FB) , 39% and 31%,Amazon.com Inc. (AMZN) 22% and 22%, Apple Inc. (AAPL) 11% and 12%, Microsoft Corp. (MSFT) 8% and 8%, and Alphabet Inc. (GOOGL) the parent of Google, 21% and 18%. (For more, see: Facebook Stock Breaks Out From Key Resistance.)
Remove these five stocks, and sales growth for the S&P 500 falls from 5% to 4% in both 2017 and 2018, Goldman estimates. Another compelling story Goldman gives for the technology sector, despite its high valuation, is a collective net profit margin of 20%, versus 10% for the S&P 500 as a whole. The FAAMG stocks enjoy projected net margins in the range of 21% to 38%, with the exception of Amazon.com, at 1% in 2017 and 2% in 2018, per Goldman.
Banks Boost Payouts
Banks have announced that they will return a collective $131.5 billion to shareholders in the form of dividends and share buybacks over the next 12 months, up from $91.7 billion, for an aggregate increase of $39.8 billion or 43%, Goldman reports. The bigger the banks, the bigger the boost. Money center banks are raising payouts from $58.8 billion to $90.5 billion, up $31.7 billion or 54%. For regional banks, the increase will be from $17.2 billion to $23.4 billion, up $6.2 billion or 36%. Among trust banks, the boost will be from $5.6 billion to $6.7 billion, up $1.2 billion or 21%.
For the financial sector as a whole, Goldman forecasts dividends to rise by 21% in 2017, which is 3.5 times the 6% dividend growth rate projected for the S&P 500. In the end, many financial firms will have dividend payouts that exceed 100% of their net income, Goldman says.
Strong Bank Earnings
Goldman is forecasting that the S&P 500 financial sector will enjoy 13% earnings growth for full-year 2017, second only to energy, which is rebounding from a loss-ridden 2016. As of July 21, Goldman notes that 45% (30 out of 66) of the financial firms in the S&P 500 have reported second quarter earnings, with 47% of those beating consensus earnings estimates, and 30% surpassing consensus revenue projections. Negative surprises on earnings and revenues so far have been recorded by 10% and 20%, respectively, of the financial firms reporting so far. The average value of the surprises has been a positive 2% on earnings and a positive 1% on revenues.
Interest Rate Sensitivity
Goldman also points out that the financial sector is the most sensitive to bond yields, with higher yields producing greater net interest margins, the difference between the rates at which banks acquire and lend money. Another positive for the sector is Goldman's forecast that the Fed Funds Rate will increase by another 25 basis points before year-end, to a range of 1.25% to 1.50%, while the yield on the 10-Year U.S. Treasury Note will rise by 50 basis points to 2.75% before the year is out. (For more, see also: How the Fed Fund Rate Hikes Affect the US Dollar.)
Regulatory Relief
Meanwhile, regulatory relief for banks and other financial institutions appears to be on the way, writes financial books author and former investment banker William D. Cohan in an opinion piece for Barron's. An unintentional side effect of the Dodd-Frank Bill, in its quest to reduce risk in the financial system, has been to constrain lending to small and medium-sized businesses, especially those with below-investment-grade credit ratings. This, in turn, has limited banks' opportunities for profit, while also dampening overall economic growth. As part of their pro-growth agenda, the Trump administration and like-minded members of Congress are likely to loosen these restrictions, Cohan says.
By Mark Kolakowski
Source:https://goo.gl/5NGGvD
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