Financial stocks could be among the biggest beneficiaries of the Federal Reserve’s upcoming policy pivot, according to Lauren Goodwin, chief marketing strategist at New York Life Investments. With the Fed expected to cut rates starting next week, Goodwin says it could be a friendlier environment for banks and financial services firms as the yield curve steepens. Meanwhile, regulatory shifts and ongoing industry changes could serve as additional tailwinds, particularly for the sector’s biggest players, she said. “If we do expect we’re going to get a few rate cuts out of the U.S. that contributes to a steepening of the curve — tends to be really constructive for financials, not to mention the deregulation and some of the industry evolution that we anticipate there,” Goodwin said in an interview on the sidelines of Future Proof Festival in Huntington Beach, California. “I think the large-cap financials are going to be a big part of that. So I love financial services.” The yield curve steepens when the Fed cuts short-term rates while long-term rates stay higher. Since banks borrow short term and lend long term, a steeper curve improves banks’ lending profitability. Additionally, lower rates tend to boost demand for loans, while investment banks usually see more deal-making activities. Several financial services stocks are trading at or near 52-week highs, including Citigroup , Morgan Stanley and Goldman Sachs . Another area of the market that could see a boost is the booming artificial intelligence trade, Goodwin said. “The winners that we see in the equity market are likely to still continue to be a part of the story. But a broadening of the trade in the event of a rate cutting cycle is constructive for broadening of performance as well,” Goodwin said. The strategist expects the central bank to lower the overnight funds rate by 25 basis points on Sept. 17, which she called a Goldilocks scenario. “Twenty-five basis points, I think, is right in the middle of signaling the potential for an improvement in confidence without raising the risk of inflationary pressures,” she said. A quarter-point rate cut is the most likely scenario being priced in by markets, with futures contracts assigning a 92% chance Tuesday, according to the CME Group’s FedWatch Tool. There’s a small 8% chance that the Fed could cut its key interest rate by half a percentage point next week.
Financial stocks are set to shine with Fed cutting rates, market strategist Lauren Goodwin says