'Investors are on pause' with financial stocks: Analyst

Big banks Bank of America, Wells Fargo and Citigroup reported earnings today. Albion Financial Group Partner and CIO Jason Ware joins Yahoo Finance Live to discuss.

Video Transcript

JULIE HYMAN: So let's talk, first of all, about the banks for a moment. I was just looking at the XLF, which is the ETF that tracks the financials. It's up about 23% year to date. This has been a popular trade for people to get into. It's been viewed as part of the value trade. How are your clients-- how are you and your clients viewing it? And what are the earnings telling you thus far about how that trade is going to go from here?

JASON WARE: Yeah, good morning, Julie. Good to be with you. So, you know, as you noted as of late, bank stocks and the financial sector writ large has been flagging a bit after what's been a pretty strong early part of the year for that sector. And I think there's a couple of things going on. I think first of all, the elements that were driving bank stocks higher and other groups as well in that cyclical and value trade has begun to wane a bit as the market is beginning to digest what is now becoming known as peak growth.

And I think a lot of the reason that we saw cyclical and values moving higher after we got the vaccine news last November from Pfizer was that we were going to have this big economic reopening, a boom in the economy, higher inflation. And all of the things that have been lacking for the value and cyclicals trade for the better part of the last decade were finally coming to fruition. It was a 2% GDP growth. We were going to get 6%, 7%, 8% GDP growth. And in that environment, those kind of stocks work, including financials. That's beginning to change. And we're getting a rotation back into tech. So I think that's the first thing.

Second, we have interest rates that have dipped as of late. And of course, banks are tied very closely to what's happening with yields. And then finally, what we've seen with these earnings reports, as you guys were talking about, is kind of a mixed bag. I think the topline numbers have been great. The beats have been fantastic. But under the hood, we have things like credit and debit card spend for JPMorgan, which is a stock we own for clients, was up 45% and 22% relative to pre-pandemic levels.

So the consumer is out spending and using their cards. However, if you look at trading volume, a lot of the capital market stuff that was really working for the banks during the pandemic, that has dropped dramatically. Fixed income trading, et cetera, has come down. So we kind of have this push and pull and a bit of inertia. And as a result, I think investors are on pause with regards to financial stocks for now.

JULIE HYMAN: Yeah, and consumers may be spending to your point, but they are not borrowing as much money from the banks, which has also been problematic for them, right? So if we are starting to see-- and we have been seeing a little bit of this rotation out of the value trade into the growth trade. It's happening again today, right, with the strength in technology. Is-- are we going to sort of have that whipsaw back and forth between them, do you think, for the remainder of the year? Or do you think that this latest rotation back into tech is going to be more sustained?

JASON WARE: Yeah, always hard to call short-term moves. But if forced to guess, I would say that the momentum that we're seeing in the growth in technology side probably has some legs. I say that because if you look at a number of these large cap tech stocks, these secular growth names that worked for so many years in the low economic growth environment, they are beginning to break out both technically and fundamentally, whether it's Adobe, whether it's Amazon, whether it's Visa.

Microsoft and Google have been trending higher all along, but we're now beginning to see broader participation among the tech and secular growth stocks. I think that momentum can carry on itself in particular if yields behave themselves and, again, more importantly, if the flight path for the macro economy is back closer to trend growth that we saw in the prior economic expansion. And that is our base case, that we're going to have this boom this year. We're going to settle into maybe a 3% growth trajectory in 2022.

And that steps down again that closer to that 2% trend growth that is really a function of structural factors like low productivity, low demographic growth, low population growth. All of these things that kept the economy at around 2% for the better part of the post great financial crisis period, those haven't changed. And once we get back to that and as investors see that as being the likely outcome over the near term, let's call it the next 12 to 18 months, I think tech stocks and growth stocks will continue to work in that paradigm.