Morgan Stanley: Bank stock sell-off is overdone

Pedestrians walk past a Capital One ATM outside of a bank branch in New York.
Craig Warga | Bloomberg | Getty Images

The pullback in financial stocks this year is a buying opportunity, Morgan Stanley told clients Monday, recommending an overweight stance on the group.

"We have been overweight the financial sector since April 2015 and continue to see multiple compelling reasons for outperformance in the near future," the firm's equity strategist, Adam Parker, wrote in a research note. "The case for overweighting financials is a combination of weak positioning, improving deal volume, limited currency sensitivity, high growth in shareholder return, and a very low price."

Year to date, the S&P financial sector is the worst performing group in the S&P 500 index, down 5 percent through Friday, due to uncertainty over the Fed's next move regarding higher interest rates, which benefit bank stocks. Bank stocks surged at the open of trading Monday.