TSMC Q2 profit soars 61% to record high; sees AI demand offsetting forex headwinds
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I keep getting the questions “why are financials so weak” and “shouldn’t bank stocks be outperforming in a rising interest rate environment”?
Not all rising interest rate environments are good for financials. Banks tend to borrow on the short-end of the yield curve and lend on the long end. Their margins expand when long-term interest rates rise faster than short-term interest rates. The opposite has been happening for most of 2018. In fact, the 10-Year - 2-Year yield spread has been declining since 2014.
There are many other factors that impact financials’ margins. For example, if you look at JPMorgan's (NYSE:JPM) chart below, you will notice that the decline in the 10-2-year yield spread hasn’t really affected their profitability. JP Morgan’s earnings have increased by 50% since 2014. For the same period, its stock has appreciated 79%, not counting the dividends.
Overall, financials as a group have been showing relative weakness for most of 2018. With a relative strength of 52, the Financial Select Sector SPDR ETF (NYSE:XLF) is right in the middle of the stack. $24-25 seems like a logical level of potential support. A move above 28.50 would be a bullish development.
