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Quarter-End Insights

Our Outlook for Financial-Services Stocks

The easy money has been made in financial-services stocks.

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  • An extended rally in financial-services stocks has drastically reduced the number of bargains in the sector.
  • Emergency liquidity provisions have lessened the chances of a funding crisis in Europe, but the sovereign debt crisis is not over. 
  • Hints of an economic recovery have improved the prospects for rate-sensitive names.

A bout of renewed optimism about the prospects for the global economy resulted in a dramatic rally in financial-services stocks in recent months. The aggregate Morningstar price/fair value ratio for stocks in the sector rose to 87% from 78% during the quarter. A few stocks remain undervalued, but with the European sovereign debt crisis still unresolved, the Chinese economy possibly slowing, and a long way to go before the U.S. economy returns to full steam, we think investors should remain cautious as they wade back into the sector. 

Jim Sinegal does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.