Financials sector

Matt Reed is co-portfolio manager of Fidelity Advisor^® Financials Fund

Financial stocks performed well to start 2025, riding post-election optimism about the improving prospects for mergers and acquisitions, and deregulation under the Trump administration. The sector’s performance versus the S&P 500^® deteriorated somewhat later in the year amid growing concern about the labor market and the health of the U.S. and global credit markets. That said, U.S. economic growth remained resilient, as did consumer spending, and in late 2025, I see what I believe are especially good prospects for certain regional banks and alternative asset managers.

2025: A middling year for financials

Heading into 2025, the market was optimistic about the prospects for the financials sector. Investors were feeling good about the new administration’s plans for deregulation and the potential for increased merger-and-acquisition activity. For banks, in particular, it was believed that less regulation could mean more opportunities to invest capital at attractive returns.

However, the administration’s sharp focus on tariffs early in 2025 caused uncertainty in the market, which, in turn, seemed to weigh on corporate activity over and above any expected benefits from the election. Similarly, uncertainty, as well as the ongoing reversion of household liquidity to normal levels from the elevated peaks present during the pandemic, appeared to weigh on consumer sentiment, resulting in falling confidence and more muted discretionary spending. These factors, along with persistent inflation and the Fed’s wait-and-see stance on policy interest-rate reduction, hampered the relative performance of financial stocks during the summer.

Later in the year, as tariff concerns eased somewhat, we learned that the job market was less robust than previously thought, and credit markets came into focus with the September bankruptcies of subprime auto lender Tricolor Auto Group and auto parts supplier First Brands Group. While these problems appeared idiosyncratic, for an economy that hasn’t had a real credit downturn in over a decade, the issues were a reminder of potential risks and introduced more concern among savvy investors. As a result, the financials sector underperformed the S&P 500^® index in the second half of 2025 through November. From the start of the year through November 30, the S&P 500 advanced about 18%, versus about 6% for financials stocks.

Year-to-date price return

2026: Stockpicking will be key

As we look ahead to 2026, it’s worth noting that the financials sector is cyclical, meaning that its performance is usually closely tied to the strength of the broader U.S. economy. As of the fourth quarter of 2025, the economy appears resilient overall, but the broad GDP numbers show notable strength in some areas, such as capital spending by hyperscalers for generative artificial intelligence, and more uneven activity in other areas, such as manufacturing. Economic activity in the manufacturing sector contracted in October for the eighth consecutive month, per the ISM^® Manufacturing PMI^® Report. Likewise, the top tiers of consumers are faring well due to the recent strength in the stock market and due to real estate price appreciation, but further down the economic ladder, there are signs that consumers may be more stretched. This uneven data and recovery could offer good bottom-up stockpicking opportunities in 2026.

Investment conviction in select regional banks and alt asset managers

Against this backdrop, regional banks are one area where I see opportunity in the year ahead. However, it’s important to emphasize that this is not a broad, bullish call on the industry. In fact, as we close out the year, I believe that careful bottom-up security selection is more important than ever. Within the category of regional banks, we’ve seen an uneven recovery in the aftermath of the crisis from early 2023 amid restrictive monetary policy and problematic commercial real estate loans. However, certain banks with a solid deposit base, a strong network and superior technology are well capitalized and seem poised for further healthy growth.

Among regional banks, one fund holding I like as of late 2025 is Truist Financial, a large holding as of October 2025. This is a regional bank that resulted from the December 2019 merger of BB&T and SunTrust Banks. The early integration had its challenges. However, Truist meaningfully improved its capital position after selling off the firm’s insurance broker at an attractive valuation in 2024. After studying the details of the integration to date, I believe Truist has the opportunity to be more front-footed and focused on growing the combined franchise in attractive markets.

Alternative asset managers are another group I feel could offer fertile ground for stockpicking. Since the Great Recession of 2007–2009, investors have increasingly been incorporating alternative assets into their portfolios to diversify more effectively. This larger trend favors the group. With that said, recent worries about credit in the banking system from the Tricolor and First Brands bankruptcies have spilled over—unjustifiably, in my opinion—into concerns about the private credit market, scaring off some investors, despite the leading private credit firms having no material exposure to the problems that sank those two companies. Thus, I believe there could be good values there in equities that have been mispriced.

Among other individual names I favor, I’ll mention alternative asset manager Apollo Global Management, one of the fund’s top holdings. Lately, the firm has benefited from growth in both assets under management and fee income. Historically speaking, alternative assets have demonstrated the compelling combination of lower volatility, diversification benefits, and return enhancement. In the more recent term, lower interest rates and investor concerns about private credit have been headwinds for the stock, but I believe this climate also provides a good buying opportunity for an undervalued stock.

Outlook and risk assessment

In selecting stocks for the fund, I typically look for disconnects in value looking out over a three-year time frame. This methodology has worked well for me in the past, but of course there’s no guarantee of profitability, especially over shorter time frames. With that said, the financial sector continues to offer companies that I believe should produce above-sector returns over a full market cycle. Finding those “gems” is my primary focus.