Goldman Sachs told clients to buy financial stocks as the sector will benefit from the Federal Reserve raising interest rates later this year.
"Among industries, banks and diversified financials display the highest positive correlation with both rising rates and inflation," strategist David Kostin wrote in the note to clients Friday. "We recommend investors overweight the financials sector based on our expectation that the Fed will hike three times in 2017."
Kostin cited how recent hawkish comments by Fed officials raised the probability of a 25-basis-point March meeting rate hike to 92 percent, according to futures markets.
However, he noted the growing disconnect between the smart money and long-only portfolio managers on the banking sector.
"Our analyses of the newest positioning data show that hedge funds and mutual funds hold opposing views on the financials sector," he wrote. "Hedge funds reduced their net exposure to the sector while growth mutual funds sharply increased their allocations" as financial stocks rallied 25 percent from the Nov. 8 election through Friday.
The strategist said hedge funds now have 11 percent net exposure to the financials sector, which is their largest underweight versus the Russell 3000 index. While large-cap mutual funds have financials as their most overweighted sector, according to the firm's data.
"Despite opposing views on financials, banks stocks remain popular across hedge funds and mutual funds," he wrote.
Here are four financial stocks Goldman recommends in both the firm's hedge fund VIP list and mutual fund overweight positions baskets.