Will financials rule the rest of 2018?

Financials had a bad start to the year. Over the first half, the S&P 500 financials sector fell by almost 5%. The results of the Federal Reserve’s stress tests were released last Thursday, and now the sector could be poised for a better second-half.

“Keep in mind that over the last 2 year the financials sector has been the 2nd best performing sector behind Tech and has handily outperformed the S&P 500 but YTD has been ugly. We look for the sector to get back on track in the second half of this year,” Scott Wren Senior Global Equity Strategist at Wells Fargo Investment Institute told FOX Business.

“We are overweight the Financials sector and have been for some time, he added, noting that “In our opinion, this sector should outperform as the economy improves, loan demand increases and interest rates rise into next year.”

Looking forward Wren said that Financial sector earnings are likely to grow 21% in the second quarter and about the same for full-year 2018. He added that the stress results were “good,” “better than many expected.

But, when looking for potential headwinds, the yield curve will need to be followed.

“The flattening yield curve is going to be the biggest factor that will determine what happens with the sector.  We are not predicting inversion but believe the curve will only likely be a bit steeper at year end,” according to Wren.