Excitement over bank stocks since President-elect Donald Trump's election victory looks a little overheated, analyst Dick Bove is telling clients.
Banks have been the sexiest trade since the Republican's upset win. Investors have pushed the KBW Nasdaq Bank Index up more than 23 percent since Election Day.
Fueling the enthusiasm is a belief that the new administration will push a pro-growth agenda while rolling back bank regulations like the Dodd-Frank reforms, and that the Federal Reserve will continue to raise interest rates.
However, Bove believes that while all of that could happen in the long run, the near-term picture for banks is a little less glamorous. Cost-cutting rather than revenue growth will factor more into profits, he said.
"In general, fourth-quarter reports are expected to demonstrate limited revenue growth and strong expense control," Bove, vice president of equity research at Rafferty Capital Markets, said in a note to clients. "Results could be moderately better but not in line with the stock price increases. This creates a potential risk."
As a sector, financials are supposed to have the second-highest returns of the 11 sectors in the S&P 500 for the fourth quarter, according to FactSet. Profits are projected to rise 14.5 percent for the group, compared with the 3.2 percent expected for the index as a whole.
However, Bove said the internals won't be as stellar.