The market remains confident in further economic growth, with financial stocks outperforming the overall US stock market in the past year

According to DataTrek Research, financial stocks in the S&P 500 index have outperformed the overall U.S. stock market in the past year, reflecting investors' positive outlook on the economy.

Nicholas Colas, co-founder of DataTrek, stated in a report on Tuesday: "We remain bullish on the financial sector. Even if you do not choose to overweight financial stocks, their continued leadership is a reassuring sign that the market remains confident in further economic growth."

Based on FactSet data, the Financial Select Sector SPDR Fund (XLF.US), which tracks financial stocks in the S&P 500, has risen by 31.1% in the past 12 months as of Monday, outperforming the 22.7% increase in the S&P 500 index during the same period.

The U.S. stock market has continued to rise in 2024, with the economy expanding in the second quarter. However, investors seem concerned about the possibility of the Federal Reserve tightening monetary policy excessively, leading to an unnecessary economic downturn. The market widely expects the Fed to begin cutting interest rates next week, as the Fed has maintained high interest rates to curb the economy and reduce inflation.

Colas pointed out: "The Atlanta Fed's GDPNow model continues to reflect strong economic growth in the third quarter." He mentioned that the current economic growth estimate is 2.5%, and since the beginning of the quarter, GDPNow's forecast has remained at 2% or higher.

Colas also stated: "The financial sector is not just banks, with banks accounting for only 25% of the index. The sector also includes many companies with strong growth cycles, such as Visa (V.US) and Mastercard (MA.US), as well as asset management giants like BlackRock (BLK.US) and Blackstone (BX.US)."

The U.S. financial sector has outperformed the S&P 500 index in the past 12 months, with the Financial Select Sector SPDR Fund rising by 19.6% as of this Monday, far exceeding the 14.7% increase in the S&P 500 index during the same period.

Despite the strong performance of financial stocks in the past year, their 8.4 percentage point excess return "still falls short" compared to previous mid-cycle economic periods. For example, during the period from 2017 to 2018, financial stocks had an excess return as high as 20 percentage points.

On Tuesday, the financial sector of the S&P 500 experienced a sharp decline, with bank stocks performing poorly. Randal Quarles, the Vice Chairman for Supervision at the Federal Reserve, stated that U.S. regulatory agencies will make significant revisions to their bank capital rules proposal, cutting the expected impact on the largest banks in half and exempting most measures for smaller banks. According to FactSet data, JPMorgan Chase (JPM.US) closed down 5.19%, Goldman Sachs (GS.US) down 4.39%, and Citigroup (C.US) down 2.67%. Investors are awaiting the latest inflation report to be released on Wednesday, with the U.S. Bureau of Labor Statistics set to publish the Consumer Price Index (CPI) data for August