Financials may be lagging, but here’s why one strategist believes a turnaround is in sight

Worries about tax reform and a flattening yield curve have hammered shares of financials in the past week, but the sell-off has some market watchers sensing opportunity.

"They're going to prosper because of two things," said ACG Analytics strategist Larry McDonald on Thursday's "Trading Nation." "Growth and deregulation."

McDonald reasons that tax cuts will eventually be passed, and when they are, higher interest rates should follow, which should help the banks.

Financials generally perform better when the difference between short- and long-term rates is big. Currently that difference, called the yield curve, is the narrowest it has been in 10 years.

But McDonald feels that has already been priced into bank shares. "The bottom line is the banks are pricing in a flat curve, which has already happened, he said. "Going forward they'll benefit from a steepening curve."

On the other hand Dennis Davitt, portfolio manager at Harvest Volatility Management, is still wary on the banks. He sees a combination of regulations and foreign demand for debt holding long-term rates lower, which would in theory crimp bank margins.

"The regulations around the long end of the curve, forcing banks to hold those bonds, and the demand for longer-dated bonds out of European banks is going to continue to hold the long end of the curve down," he said on "Trading Nation." "[That's regardless] of what the economy does, regardless of what the Fed does on the front end."

Banks were down slightly Friday and have fallen more than 2 percent for the week, according to the XLF financials-tracking ETF.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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