Fed's rate cut will be good for banks, KBW upgrades Citigroup, Bank of America and Goldman Sachs

Published Fri, Jul 26 20199:35 AM EDTUpdated Mon, Jul 29 20193:53 PM EDT

Given current economic strength, soon to be bolstered by the Federal Reserve's easier policy, banks will soon outperform as people become more willing to spend money, according to Keefe, Bruyette & Woods. The firm upgraded the universal bank sector to overweight from market weight and upgraded shares of Citigroup , Bank of America and Goldman Sachs to outperform from market perform. "We are upgrading the Universal Bank group to overweight from market weight as we believe that the economic cycle will be extended following Fed rate cuts and the current valuation for the group is attractive as we are not as late cycle as feared," said Keefe, Bruyette & Woods analyst Brian Kleinhanzl said in a note to clients on Thursday. Investors are expecting the Fed to cut interest rates by at least 25 basis points at its policy meeting ending on July 31. Kleinhanzl already thinks the macro environment is strong and a rate cut will only help spur more economic growth, making people more willing to take out loans, invest more in capital markets and use credit. Kleinhanzl said he also expects a rotation back to financial stocks as estimates have bottomed and returns can improve. "Investors have reduced allocations to the group and we believe the prospect of an extended economic cycle, low credit losses, and the potential for earnings growth to improve will allow the group to re-rate to higher multiples," he said. GDP data Friday showed that growth decelerated from the prior quarter, but not as much as analysts estimated. Personal consumption expenditures rose 4.5%, the best performance since the fourth quarter of 2017, further demonstrating the strength of the consumer. Kleinhanzl upgraded shares of Citigroup, Goldman Sachs, and Bank of America, as he believes "these three stocks are best positioned to benefit from an extended economic cycle that has the prospects to grow further." Shares of Citigroup rose 1.11% on Friday. Shares of Bank of America were up 1.42% and Goldman Sachs shares gained 0.98%. — with reporting from CNBC's Michael Bloom

Brendan McDermid | Reuters

The firm upgraded the universal bank sector to overweight from market weight and upgraded shares of Citigroup, Bank of America and Goldman Sachs to outperform from market perform.