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Financial stocks will rise next year even after the sector's recent surge, according to one top Wall Street firm.
JPMorgan's research group shared its top financial stock ideas in a note to clients Friday.
"We expect large bank stocks in 2018 to continue to be driven by changes in regulations and taxes," the firm's analysts wrote in a report. "We see investor sentiment on regional bank stocks improving in the year ahead, particularly with tax reform now making progress (and regional banks a key benefactor) and new leadership at key regulatory agencies taking a much more friendly approach with banks."
The Financial Select Sector SPDR Fund is up 18 percent through November, matching the S&P 500's 18 percent gain. However the bank stocks are soundly outperformed the market since the end of May with an 18 percent gain versus the index's 10 percent return.
Here are the firm's favorite overweight-rated financial stock ideas along with its current price targets.
1) BlackRock (BLK)
Analyst Kenneth Worthington has a $558 12-month price target for BlackRock shares, which is 12 percent higher than Thursday's closing price.
"BlackRock generates significant income from abroad, and we see the company benefiting from higher fee rates and margins, driven by better non-US equity market returns, as non-US operations are typically higher fee and higher margin. Higher international earnings should also lower taxes. BlackRock continues robust organic growth, driven by iShares and Aladdin. BLK is our top pick heading into 2018."
2) Charles Schwab (SCHW)
Worthington has a $52 12-month price target for Charles Schwab shares, which is 7 percent higher than Thursday's close.
"We see potential for SCHW shares to perform well around the higher interest rate outlook and growing bank assets. We expect Schwab bank asset growth to increase substantially with faster and larger transfers from money market fund assets to bank assets."
3) KeyCorp (KEY)
Analyst Steven Alexopoulos has a $21 Dec. 2018 price target for KeyCorp shares, which is 11 percent higher than Thursday's close.
"KEY shares trade at a depressed multiple vs. peers in our coverage as well as to a basket of larger regional banks. We like the setup of (1) a low bar from the market while (2) management is aiming high. As KEY works to become a top performing regional bank, with the corporate bank a key driver, we see valuation improving."