3 Financial Stocks to Buy Now on Core PCE Coming in High

The May Core PCE inflation report, indicating a 0.22% month-over-month increase, has reinforced expectations for sustained Federal Reserve hawkishness and delayed anticipated rate cuts, leading to a rise in the 10-year Treasury yield to approximately 3.45%. This environment of prolonged higher interest rates is proving advantageous for financial stocks by improving net interest margins and boosting overall profitability. Consequently, the financial sector has performed strongly, with the S&P 500 Financials Select Sector SPDR (XLF) up 9.1% year-to-date, making companies such as Nelnet (NNI), Pagaya Technologies (PGY), and United Fire Group (UFCS) attractive due to their strong earnings momentum and favorable metrics.

Analysis

The May Core Personal Consumption Expenditures (PCE) inflation report, showing a 0.22% month-over-month and 2.68% year-over-year increase, has solidified market expectations for a prolonged hawkish stance from the Federal Reserve. This has delayed anticipated rate cuts and driven the 10-year Treasury yield up to approximately 3.45%. This sustained higher interest rate environment is a direct tailwind for the financial sector, as it tends to boost net interest margins for banks and profitability for lenders and insurance companies. The sector's outperformance is evident in the S&P 500 Financials Select Sector SPDR (XLF), which has gained 9.1% year-to-date. Within this favorable macro backdrop, specific companies are showing strong fundamental momentum. Pagaya Technologies (PGY) stands out with an expected earnings growth rate of 195.2% for the current year, supported by a 39.2% upward revision in consensus earnings estimates over the past 60 days. Similarly, Nelnet (NNI) is projected to see 59% earnings growth, with its estimates revised up by 16.8% over the same period. United Fire Group (UFCS), a property and casualty insurer, also shows positive momentum with a 3.3% upward earnings revision and an 8% expected growth rate for the next year, indicating broad strength across different financial sub-sectors.

Key Decisions for Investors

• Given that persistent inflation is supporting a 'higher for longer' interest rate environment, investors should consider increasing or maintaining overweight exposure to the financial sector, which benefits directly from higher yields.
• For growth-focused portfolios, Pagaya Technologies (PGY) and Nelnet (NNI) warrant particular attention due to their exceptional expected earnings growth of 195.2% and 59% respectively, and significant positive revisions to their earnings estimates.
• Investors should monitor upcoming inflation data and Federal Reserve commentary closely, as any signs of rapidly cooling inflation could alter rate expectations and potentially reduce the profitability tailwind for these financial stocks.