Financial stocks may emerge as one of the biggest winners from the Federal Reserve’s anticipated policy pivot, according to Lauren Goodwin, chief marketing strategist at New York Life Investments.
With the Fed expected to begin cutting rates next week, Goodwin highlighted that banks and financial services firms could see profitability improve as the yield curve steepens.
“The steepening of the curve tends to be really constructive for financials, not to mention the deregulation and some of the industry evolution that we anticipate there,” Goodwin said in an interview at the Future Proof Festival in Huntington Beach, California.
She added that large-cap financial institutions are positioned to benefit the most, calling them a key part of the next market phase.
The yield curve steepens when short-term rates fall faster than long-term rates.
Since banks typically borrow at short-term rates and lend at longer-term rates, this environment can expand lending margins.
Lower interest rates may also drive stronger loan demand, while investment banks could benefit from increased deal-making activity.
Financial sector momentum builds
A number of financial services stocks are already trading at or near 52-week highs, including Citigroup, Morgan Stanley, and Goldman Sachs.
Goodwin pointed to these gains as an indication of optimism surrounding the sector, which could gain additional momentum from the Fed’s actions.
She emphasized that the combination of rate cuts, regulatory shifts, and structural changes within the industry may create multiple tailwinds for financials.
The deregulation trend, along with evolving industry practices, could further strengthen the position of the sector’s largest players.
Goodwin also noted that the supportive environment for financials comes as markets continue to focus on the rapid rise of artificial intelligence.
While AI-related stocks have been dominant in recent months, she suggested that rate cuts could broaden market participation, creating more balanced performance across sectors.
Fed’s next move in focus
The Federal Reserve is widely expected to announce a 25 basis point cut to its benchmark overnight rate on Sept. 17.
Goodwin described this as a “Goldilocks scenario,” striking a balance between signaling improving economic confidence and avoiding the risk of fueling inflationary pressures.
“Twenty-five basis points, I think, is right in the middle of signaling the potential for an improvement in confidence without raising the risk of inflationary pressures,” she said.
Market expectations align with this outlook. According to the CME Group’s FedWatch tool, futures contracts on Tuesday assigned a 92% probability of a quarter-point cut.
By contrast, there is only an 8% chance that the central bank could opt for a larger 50 basis point cut.
Goodwin argued that this moderate step could support confidence among investors and consumers alike while setting the stage for stronger performance in sectors like financial services.
With the Fed poised to adjust policy and market dynamics evolving, the financial industry may be entering a more favorable phase.
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