Goldman Sachs believes the stock market is overdue for a pullback, but bank shares will still perform well even as the rest of the market treads water.
"Our tactical view remains that S&P 500 has peaked at 2,400 and will fade to 2,300 by year-end," wrote Goldman's David Kostin in a note to clients at the end of last week.
The "S&P 500 has rallied by 11 percent since the election amidst optimism that corporate tax reform will increase S&P 500 earnings. However, investors will soon capitulate on their expectation of upside to 2017 EPS forecasts as they face the reality that the accretive impact from tax reform will not occur until 2018."
The S&P 500 was little changed mid-morning Monday after closing at 2,372.60 Friday.
"In fact, revisions to consensus EPS forecasts during the past few months have been negative for both 2017 and 2018," Kostin added.
The Financial Select SPDR Fund is up nearly 25 percent since the election, but that rally is on more than just tax reform from President Donald Trump and the Republican Congress, which is why Goldman still likes the group.
"Regulatory reform could be a significant driver of higher bank earnings," stated the note.
Plus, rising interest rates this year are already boosting banks' bottom lines.
"Two hikes this year would boost bank profits by at least 3 percent," wrote Kostin. "Financials is the sector with the greatest upward EPS revision potential and banks will benefit most."
So how should investors play it? Goldman looked at the regulatory changes likely to take effect and believes three banks will see the biggest jump in earnings from those changes: