In 2024, the financial sector in the United States demonstrated strong performance, with many analysts believing it will continue to soar in 2025. The financial services industry may continue to benefit from robust economic growth and the Trump administration’s relaxed regulatory policies.
Currently, everything seems to be progressing smoothly. Despite the Federal Reserve’s decision to postpone interest rate cuts in January, the financial sector continues to outperform the market. Year-to-date, the S&P 500 financial index has a return rate of 7.62%, compared to the overall S&P 500 return rate of 3.24%.
So, how should one invest in the financial sector? Let’s delve deeper into the investment opportunities available.
The financial sector includes banks, brokerage firms, asset management companies, payment processors, insurance companies, credit unions, and more. These entities are responsible for fund operations and, to some extent, drive the economy.
Almost everyone, individuals and businesses alike, is somehow connected to the financial industry. If you have used a credit card, made transfers through an app, or withdrawn cash from an ATM, you have already engaged in financial transactions.
Therefore, this industry involves a large number of companies and related services. However, financial advisory firm Edward Jones suggests that investors start with the banking subsector and gradually move into insurance and diversified financial fields. Fidelity Investments also holds an optimistic view on diversified banks and transaction and payment processing companies like Mastercard and Visa.
According to a study by MX Technologies, there are over 4,500 banks within the U.S. This is a significant number that requires careful selection. Here are some of the currently standout banking stocks:
• Wells Fargo & Co.
• M&T Bank Corp.
• JPMorgan Chase & Co.
• Citizens Financial Group Inc.
• Bank of America Corp.
• HSBC Holdings PLC
• PNC Financial Services Group Inc.
Additionally, there are larger financial service sector companies:
• Berkshire Hathaway Inc.
• Visa Inc.
• Mastercard Inc.
• Morgan Stanley
• The Goldman Sachs Group Inc.
However, just like with any company, conducting research on them is crucial. Look into their profits, return on equity (RoE), earnings per share (EPS), dividend yield, and other indicators.
It’s important to note that panic can spread throughout banks and the entire financial sector. For example, in early 2023, Silicon Valley Bank and some other regional banks collapsed. However, this situation was mainly caused by internal management issues within these banks and did not escalate into a larger chain reaction. Nevertheless, it serves as a cautionary tale.
You can avoid the need for individual stock analysis and selection by investing in Exchange-Traded Funds (ETFs). These funds are managed by professionals and invest in multiple stocks. Here are some top ETFs in the financial services sector:
• The Financial Select Sector SPDR Fund
• Vanguard Financials Index Fund ETF
• PIMCO Enhanced Short Maturity Active Exchange-Traded Fund
• SPDR S&P Regional Banking ETF
• iShares U.S. Financials ETF
While banking stocks may exhibit relatively stable performance, all investments come with risks. Banks and other financial institutions, as well as financial technology companies, face specific challenges.
Financial institutions like banks have cyclical characteristics, making them particularly sensitive to market changes such as economic downturns.
During periods of high unemployment, individuals often prioritize meeting basic needs, leading to debt delinquencies. This can result in losses for financial institutions in loans, credit card, and other lending products. Additionally, in economic downturns, consumers may reduce spending, meaning they may decrease credit card usage to avoid taking on new debts, like mortgages. These factors can have varying degrees of negative impact on financial institutions.
Another significant risk that the financial industry faces is interest rate fluctuations. However, this issue can be quite complex. Low-interest environments may attract consumers to savings accounts and personal loans products, but bank profits may be constrained due to lower rates. When rates are high, consumers and businesses may reduce their demand for products like loans and mortgages, which are major revenue sources for many financial services companies.
However, the ability of specific financial institutions to handle crises ultimately determines the outcome. For example, JPMorgan Chase conducted a stress test during the COVID-19 pandemic and determined that even with a 35% decline in Gross Domestic Product (GDP) and a 14% unemployment rate, the company would still be able to survive.
Jamie Dimon, CEO of JPMorgan Chase, wrote in a letter to shareholders, “Even in this scenario, the company can finish the year with sufficient liquidity.”
Therefore, thorough analysis of these stocks and the ETFs or mutual funds containing them is crucial. According to Fidelity Investments’ analysis and prediction, diversified banks and payment processors may continue to perform strongly in 2025. The most diversified banks typically have a dozen or more income sources and have adopted elements like financial technology to better position themselves for the future of financial services.
The financial sector excelled in 2024 and has a chance to continue its robust growth in 2025. Sound economic conditions, regulatory easing, and the development of new technologies may drive this trend. Hence, investing in the financial sector could be a beneficial addition to a diversified investment portfolio. However, investors should also be aware of the potential risks the sector may face.
(c) Epoch Times. All rights reserved. This article represents the views and opinions of the author for general informational purposes only and does not constitute any recommendations or solicitations. Epoch Times does not provide investment, tax, legal, financial planning, real estate planning, or other personal finance advice. Epoch Times does not guarantee the accuracy or timeliness of the content.