One sector that has performed very well over the last year is the financial sector. At the end of June, all 34 large U.S. banks passed stress tests conducted by the Federal Reserve. These tests showed that the banks could survive a strong downturn in the economy. The results cleared the way for banks to increase dividends and buybacks of their stock both of which increase the attractiveness of their shares (see chart below).
Another factor helping the returns of financial companies is the rise in interest rates. The Federal Reserve has raised short term interest rates about 0.75% over the last year, helping to increase various interest rates in the economy and expanding banks profits on new and variable rate lending.
New financial deregulation by the government is also possible, though not a prerequisite for continued improvement in the financial sector. Three big banks Wells Fargo, Citibank and JPMorgan report earnings on Friday, which should give further insight into the sector.
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