Financials: Post-Election Rally Powers Sector to Strong 2024 Finish

For the most part, many sectors have disappointed so far in the Q4 earnings season, but a lot of financial institutions have managed to buck the recent volatility. The financial sector has been a standout performer in 2024, delivering strong returns for investors. Early concerns, such as the collapse of several small- to mid-sized U.S. banks, were overshadowed by optimism around an improving economy and lower borrowing costs. Year-to-date, the S&P 500 Financial Sector Index has outpaced the broader market, gaining over 28% year-to-date, compared to the S&P 500’s (SPX) 25% rally (Source: "Financial Sector on Stronger Ground in 2025").

The financial sector's strong performance in 2024 can be attributed to several factors, including banks' lending activities, net interest margins, and investment services firms' asset management and advisory services. Let's dive into these factors to understand how they have contributed to the sector's robust finish.

1. Banks' Lending Activities and Net Interest Margins: Banks have been actively lending to businesses and consumers, driving economic growth. This increased lending activity has been facilitated by the improving economic outlook and lower borrowing costs. For instance, the Federal Reserve's recent meeting did not indicate immediate changes in monetary policy, suggesting a wait-and-see approach regarding the new administration's policies (Source: "Can the Post-Election Rally Last to the End of the Year?"). Additionally, banks' net interest margins have been expanding, leading to higher profitability. As interest rates have been declining, banks' funding costs have decreased, allowing them to maintain or even increase their net interest margins. For example, the yield curve could steepen with further Fed cuts and rising long-duration Treasury yields, which would help Financials (Source: "Can the Post-Election Rally Last to the End of the Year?").
2. Investment Services Firms' Asset Management and Advisory Services: Investment services firms' asset management and advisory services have significantly contributed to the financial sector's strong 2024 finish. Here are some specific examples and data from the materials to support this analysis:
* BlackRock (BLK): As the world's largest asset manager, BlackRock has seen its assets under management (AUM) grow, fueled by investors shifting focus to higher-yielding assets like equities and alternative investments. This growth has been driven by enhanced market liquidity and increased demand for investment products. In 2024, BLK stock has gained 31.1% year-to-date, with an average price target implying a 7.52% upside potential (Source: TipRanks).
* Goldman Sachs (GS): Goldman Sachs' asset management division has benefited from strong market performance and increased demand for investment products in 2024. The firm's investment banking division has also seen higher fees due to a robust global economy and increased M&A activity. GS stock has gained 51.5% year-to-date, with an average price target implying a 7.62% upside potential (Source: TipRanks).
* Broad-based growth in asset management: The overall asset management industry has experienced significant growth in 2024. According to a report by PwC, the global asset management industry's AUM reached $108.4 trillion in 2024, up from $94.8 trillion in 2023. This growth has been driven by increased investor demand for diversified investment products and services (Source: PwC's Asset Management 2024 report).

These examples and data illustrate how investment services firms' asset management and advisory services have contributed to the financial sector's strong 2024 finish. The growth in AUM, increased demand for investment products, and higher fees from advisory services have all played a significant role in driving the sector's performance.

In conclusion, the financial sector's strong performance in 2024 can be attributed to several factors, including banks' lending activities, net interest margins, and investment services firms' asset management and advisory services. The post-election rally has powered the sector to a robust finish, and investors should continue to monitor the sector's performance as we head into 2025.