The Financial Select Sector SPDR Fund (XLF: $44), a leading ETF with exposure to the Big Banks and some Financial Services industries, including retail banking, investment banking, payments processing, fintech, and more, has been on a stellar streak over the past year and a half. Following a rollercoaster beginning in 2023, it rallied by 40% starting in November, when the Fed’s hawkish stance finally ended.
It is showing no signs of slowing down, with leading banks emerging unscathed from last year's liquidity crisis and clearing the Fed’s recent stress tests with flying colors. The tests show that 31 of the largest banks in the country are well-positioned to withstand a severe recession, helping assuage various concerns that investors have been harboring regarding the industry over the past year.
The fund distributes its assets across a basket of 71 stocks, with the top 7, including JP Morgan, Goldman Sachs, Bank of America, Wells Fargo, and Berkshire Hathaway, making up nearly 50% of the assets. Thus, the resilience and outperformance showcased by the big banks in their recent quarterly figures have renewed interest in the sector and its most prominent ETF.
Last night, Goldman Sachs released its second-quarter results, posting a 17% YoY growth rate with $12.7 billion in revenue. With this, the company joins the ranks of JP Morgan, Wells Fargo, and Citigroup, all producing strong quarterly performances, often exceeding consensus estimates by wide margins and primarily driven by growth across investment banking, advisory, and wealth management divisions.
After a sluggish year, corporate mergers and acquisitions are experiencing a resurgence. This shift coincides with the Federal Reserve's change in interest rate policy, suggesting companies are more confident about future economic conditions with limited expectations for further rate hikes. Similarly, banks are benefiting from a renewed wave of activity. The return of IPOs, debt refinancing deals, and other financial transactions generate significant fee revenue. We anticipate a surge in the IPO market throughout the latter half of 2024, with continued growth in 2025 and 2026. This is partly driven by the emergence of numerous artificial intelligence companies, often called unicorns, due to their high valuations and desire to raise capital through public listings. Based in Silicon Valley and beyond, these AI pioneers are poised to be a significant force in the upcoming IPO wave.
The stock market, which hit new records in June, helped improve profitability across the asset and wealth management divisions of the big banks. Alongside their trading desks, which are raking in fat profits for the first time in years owing to rising volumes and volatility, these strong secular tailwinds are leading up to what is being termed one of the best years for the industry in the recent past.
Markets are riding on the increasing possibility of Trump 2.0, which means tax cuts, deregulations, and trade wars at the very least, all of which bodes well for the domestic US industry and the Banks. The Financial Select Sector SPDR Fund is undoubtedly one of the best vehicles to ride this trend, with its extensive track record going back 26 years and an incredibly low gross expense ratio of just 0.09%.
Our Target is $47, and our Sell Price is $35. The stock has rallied from the low of $32 in November to its current level, and we expect more of the same as this bull market continues. Yes, today is a rough day, and this, too, shall pass. With AI leading the parade, we believe the market will be higher at the end of the summer and year. We are raising the Target today to $52 and the SP to $39.