The summer is hot and so is the housing market in the United States. Mortgage applications for the last month are up 15% year-over-year. Housing starts in June accelerated to an annualized pace of 1.174mm. Housing is still a sizable piece of the US economy and was one of the several reasons we cited for why the US recovery maintains on track. Economic expansion brings top-line growth, something sorely needed when corporate profit margins remain elevated.
Financials continue to surprise to the upside since hitting a lull in the first week of July. With several years of deleveraging abating while economic growth is moving along and demand for loans increases, banks are in a position to see some acceleration in earnings growth. Combine that with a history of performing well in a rising rate environment (which Fed Chairwoman Janet Yellen reiterates often) and the case starts to be made for financial exposure in a portfolio. Valuation of the top-tier banks reflect their relative position of strength, so opportunity may be found a little further off the beaten path.