If price action is any indication of where the market is going, then the recent performance in the financial sector can be an excellent gauge for investors to figure out where the best opportunities might be. By comparing different industry performances, investors can also gain a deeper understanding of where the economy is headed.
It is well known that when banking stocks start to outperform, the United States economy is seen as safe and in good hands moving forward, and no matter what the bearish traders out there might say, that is the case today. However, it won’t actually be that simple this time around because not all stocks will behave the same in this rotation.
Price action in names like Citigroup Inc. (NYSE: C), Goldman Sachs Group Inc. (NYSE: GS), and J.P. Morgan Chase & Co. (NYSE: JPM) have all pointed to an improving economy ahead. But according to the spreads between the iShares S&P 500 Value ETF (NYSEARCA: IVE) and the iShares S&P 500 Growth ETF (NYSEARCA: IVW), value stocks will outperform in this new economic cycle, which aligns with a more bullish economy ahead backed by banking price action.
What Citigroup Stock’s Run Tells You
Over the past month alone, Citigroup stock has outperformed the broader S&P 500 by as much as 10%, signaling that this commercial bank has all the right tailwinds behind it to keep pushing for more. What this means for investors can be broken down into two major themes.
First, the market is perceived as optimistic about commercial banking activity, which is more dependent on consumers. Second, some stocks and financial products in the market, such as mortgages and credit cards, can definitely benefit from this trend.
This is probably why over $1 billion worth of institutional buying made its way into Capital One Financial Co. (NYSE: COF) over the past quarter alone, signaling interest in this credit card company for a better consumer environment. Or why analysts at Truist Financial also decided to boost the company’s price target in late January 2025.
Where they previously saw Capital One Financial valued at $229 per share, a new buy rating came along a much higher $257 valuation, calling for a net rally of up to 29.3% from where the stock trades today. Bullishness in this cyclical stock exposed to consumer financial trends can also be tied to the bullishness and performance behind Citigroup stock.
Mortgage Outperformance Coming Up
From this same trend in consumer financial products, investors can see why shares of Rocket Companies Inc. (NYSE: RKT) delivered a run of up to 25.2% over the past month alone, connecting the dots even further for investors. Considering that the mortgage market index still hovers at a 1996 low today, the risk-to-reward for mortgages looks fantastic.
More than that, investors can spot the $49 million worth of Rocket Companies' stock bought in the past quarter to signal more institutional interest in this space. Connecting the price performance in a commercial bank like Citigroup is paramount to finding the best opportunities within other cyclical industries, and the market agrees here.
Rocket Companies stock trades at a price-to-book (P/B) ratio of 3.1x today, commanding a steep premium over the mortgage industry’s average 1.8x valuation. While some value investors might call this expensive, seasoned professionals will remind them that the market is always willing to pay premiums for the stocks it expects will outperform.
Investment Banking Implications
Moving to the price action in Goldman Sachs and J.P. Morgan Chase, investors can come to different conclusions, which have to do more with the business sector itself. Outperformance in these investment banks could mean that the market expects stronger business activity ahead for this year, and there are a couple of reasons why.
Now that more capital has flown into the iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT), yields are coming down a bit from where they previously were, creating a more flexible and friendly environment for businesses to finance their operations and expansion plans.
This might be why some institutional buyers started buying into the iShares Russell 2000 ETF (NYSEARCA: IWM) recently, as investors can see the $6.5 billion inflows over the past quarter, a bullish signal that cannot be ignored in this current development and banking price action.
With this in mind, investors now have a reasonable framework to navigate the current volatility spikes in the stock market caused by President Trump's recent trade tariff announcements and ensure that their portfolios survive relatively unscathed.
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The article "Banking Stocks Lead the Week: Stronger Economy on the Horizon?" first appeared on MarketBeat.
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