Strong long-term performance. Over the past 30 years, financial sector profits have grown much faster than the economy as a whole, enabling financial companies to pay above-average dividends to their shareholders and create strong price-to-earnings ratios. While past performance is no guarantee of future success, it can be helpful to look back to assess investment opportunities.
No longer regulated after the Great Recession. The 2008 financial crisis exposed problems in the financial sector that governments around the world struggled to resolve through regulation. Today, financial companies are required to take more steps to avoid problems, such as holding higher minimum capital levels to protect against losses. This reduces their risk compared to the sector in the past.
Luck for government support in recessions. The health of the financial sector has a direct impact on the health of the global economy. As a result, financial companies can count on special support during a recession or financial crisis. When banks ran into financial difficulties during the Great Recession, for example, governments bailed out many of them.
Benefit from rising interest rates. Today, interest rates are close to their historic lows. However, when they increase, banks, credit card companies and other lenders could increase their income by charging higher rates. Insurance companies can also earn more from their fixed income investments as bond interest rates rise.
Fintech innovation. Financial sector stocks have benefited from innovations such as blockchain, mobile payment applications and robo-advisers, laying the groundwork for further growth in the sector.