Bank Stocks Spring Loaded to Beat S&P 500 at 16% Lower Valuation

Financial stocks are cheap enough to beat the Standard & Poor’s 500 Index even after pulling ahead last week for the first time this year, according to Nicholas Colas, chief market strategist at Convergex Group LLC.

The attached chart is based on an indicator that Colas cited in a July 23 report, index values relative to companies’ projected earnings. The resulting price-earnings ratio for the S&P 500 Financials Index was 16 percent lower than the S&P 500 P/E as of yesterday, according to data compiled by Bloomberg.

Larger financial companies are trading at even bigger discounts, Colas wrote. The New York-based strategist cited figures that showed the industry’s 10 biggest companies in the S&P 500 by market value were collectively trading at 13 times estimated profit, or 26 percent less than the broader index.

Valuation is one of “three points of market sentiment” working in favor of financial stocks, Colas wrote. The others are the Federal Reserve’s potential to raise bond yields more than money-market rates and gold’s falling price, suggesting investors have more confidence in the U.S. banking system.

The S&P 500 financial index rose 0.8 percent for the year through yesterday, beating the S&P 500’s year-to-date increase of 0.4 percent. The industry barometer moved ahead on July 22 after trailing by as much as 4.9 percentage points in April.

“This is one group that clearly has upside” at least until the Fed’s September policy meeting, which may produce the first increase in the central bank’s key rate since 2006, Colas wrote. “And perhaps even past that date.”