U.S. Financials? Yes!

Before you start throwing daggers my way for the headline, let me point out that’s exactly what appeared in the subject line of an email containing UBS strategist Julian Emanuel’s new report on the industry. He explains why he’s excited about the financial sector:

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In conversations with investors, skepticism remains high while interest in the Group remains low; however we see a number of positives converging that could prove to be a significant tailwind for Financials over the next twelve months.

UBS’ view of the US in 2015 is one of continued equity market strength (Year End 2015 S&P 500 Price Target of 2,225), bolstered by a solid economy (GDP growth forecast 2.9%) and likely rising interest rates, with the Fed expected to begin the rate normalizing campaign in mid-2015, leading to a year end 10 year Bond yield of 3.5%. The economic strength (job creation in excess of 200k/mo. since January, continued house price recovery) of the past several quarters has boosted consumer confidence, which is highly correlated to Financial share performance, to post-Crisis highs. Two key underpinnings of the 2015 Outlook are higher volatility and a continuation of robust M&A activity. As evidenced by recent earnings results – US Financials grew 3Q 2014 earnings by 9.1% and revenues by 5.6% – a strong issuance and corporate deal-making environment combined with market volatility catalyzing higher trading volumes creates a near “perfect storm” for Financials. And if the rate hike cycle of 2004-06 is a guide, Financials will be able to weather Fed policy normalization and further yield curve flattening from still relatively steep levels.

Financials are certainly having a good day today. The Financial Select Sector SPDR (XLF) has gained 0.7% to $24.25 at 12:24 p.m., while Citigroup (C) has risen 1% to $54.03, JPMorgan Chase (JPM) has advanced 0.8% to $60.62 and Bank of America (BAC) is up 0.9% at $17.16.