Barclays says the prospect of lower interest rates over the next year is not necessarily bearish for U.S. financial stocks, unless the Federal Reserve is cutting into a recession.
“We remain Positive on Financials despite widespread expectations for lower rates over the next 12 months,” the bank wrote in a note to clients on Friday.
While some investors are concerned about “net interest margins and pressure on asset yields,” Barclays’ analysis of seven Fed rate-cutting cycles since 1990 shows the sector “does not necessarily underperform the broader index, with a median excess return of +142bp over the six months after rate cuts begin.”
Macro conditions are key, the bank added. Financials “significantly underperformed when rate cuts were responding to contagion in the financial economy (e.g., 1998 and 2007) or outright recession,” but performed better when “risks of a credit crunch were contained.”
Barclays said its outlook through 2026 “skews more toward the latter than the former,” assuming the U.S. economy slows at a “manageable pace.”
Earnings trends are also said to be favourable. Barclays said the sector “continues to see better earnings revisions than the broader market” and, at 16 times next-twelve-months earnings, is “trading at a wider-than-average discount to the S&P 500.”
Potential benefits include a steeper yield curve if “the long end remains well-anchored” and possible upside from deregulation or mergers and acquisitions.
Given these dynamics, Barclays does not view prospective Fed cuts as “a major hurdle for Financials,” so long as the economy avoids a deep downturn.
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