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A September rally may not be in the cards for financial stocks, as the stock market is off to a lackluster start during this historically very poor month for equities. To make matters worse, Wall Street is upset by slight increases in interest rates and oil prices that we’ve seen so far in September.
However, I believe that by Thanksgiving financial stocks will attain liftoff. That’s because I agree with Citizens Financial (NYSE:CFG) CEO Bruce Van Saun who told Bloomberg TV on Sept. 7 that The Federal Reserve is done or nearly finished hiking interest rates.
Specifically, Van Saun said that the central bank will either not raise rates again or increase its benchmark rate one more time by 0.25 of a percentage point. And Federal Reserve Governor Christopher Waller said on Sept. 5 that the Fed could “proceed carefully” on rates going forward, forward, and suggested the central bank could be “done” with hikes if inflation keeps being relatively tame.
Once investors internalize the idea that the central bank is finished with rate increases, Treasury rates should drop, easing pressures on banks that have accumulated a high number of bonds and making investors more upbeat on credit card and fintech firms. Here are three good financial stocks to buy to exploit this trend.
Bank of America (BAC)
Bank of America (NYSE:BAC) is changing hands with a tiny forward price-earnings ratio of just 8.5. That’s largely because investors are worried about the high amount of funds that the bank has invested in bonds.
But as I explained in the introduction to this column, the Fed is done or almost finished raising rates. Moreover, Fed Chairman Jerome Powell recently strongly indicated that the central bank could cut rates before inflation reaches its official 2% target.
Given these points, I believe that rates are headed downwards within the next four or five months. When rates drop, the value of bonds increases. Consequently, investors are likely to become less worried about bank of America and BAC stock going forward, causing the shares to advance.
And as The Wall Street Journal pointed out last month, the bank’s trading and investment banking units have been outperforming those of its peers, while its net income climbed a hefty 19% last quarter versus the same period a year earlier.
Moreover, Warren Buffett continued to hold a large stake in BAC, valued at $29.6 billion as of the end of Q2.
American Express (AXP)
Credit card network American Express (NYSE:AXP) is another one of Warren Buffett’s favorites. The tycoon held $26.4 billion of the shares as of June 30.
Further, the credit card network should benefit as interest rates and inflation drop. The declines of those two metrics will enable Americans to spend more on other items. And, given the very strong U.S. services data reported on Sept. 6, it appears that the American economy remains quite strong.
Also making AXP one of the best financial stocks to buy, its earnings per share increased to $2.89 last quarter from $2.57 during the same period a year earlier while its forward price-earnings ratio is a low 12.7.
PayPal’s (NASDAQ:PYPL) valuation has become extremely attractive, with its forward price-earnings ratio is a very low 11.1. That’s despite the fact that analysts, on average, expect its earnings per share to reach $5.64 next year, up from $4.13 in 2022.
Last quarter, PYPL’s EPS came in at $1.16, way above the 93 cents that it reported during the same period of 2022. Furthermore, its top line rose to $7.29 billion from $6.81 billion in Q2 of 2022.
Also boding well for PYPL stock, multibillionaire investor George Soros showed confidence in the name by purchasing 75,000 of the shares in Q2.
On the date of publication, Larry Ramer’s wife held long positions in BAC and AXP. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines