- Financials are having the best year since 2013 with a +24% gain YTD on the back of Trump rally.
- Regression analysis suggests XLF is currently pricing in an aggressive 46% increase in dividend payout 1 year forward.
- Justification of XLF’s current valuation hinges on strong earnings growth and dividend payout ratio increase in its top holdings, notably Bank of America and Citigroup, to materialize.
- Risks and uncertainty both politically and fundamentally outweigh the upside potential at the current price point
One of the great stories after Trump’s victory in the U.S. Election is the resurgence of U.S. financials, which jumped an eye-popping 18% since November 8th. The thesis is that Trump’s promises to unwind series of financial regulations, particularly the repeal of Dodd-Frank, as well as the increase in interest rates due to Trump’s expansionary fiscal policy, will boost banks’ profitability. The question is how much of that expectation is priced in following the massive Trump rally in XLF.