Our Outlook for Financial-Services Stocks

• With a sector price/fair value estimate ratio of 87%, opportunities in financial-services stocks are becoming scarce.
• Some U.S. banks remain on the mend, while others continue to struggle. Fast-growing Latin American banks are hitting a speed bump, while Canadian institutions continue to post healthy profits despite macro headwinds. European banks' issues are yet to be resolved.
• Diversified asset managers are best positioned to thrive in a volatile environment.

Over the past few months, financial-services stocks made up the ground lost in the second quarter, with the aggregate Morningstar price/fair value estimate ratio for stocks in the sector rising to 87% from 78% over the summer. While a few bargains remain, low prices are for the most part accompanied by higher risk and/or near-term challenges such as low interest rates and lackluster capital markets.