2-year Treasury yield drops heading into 2026

Key Concepts

• Goldman Sachs (GS): A financial institution discussed for its stock performance and valuation.
• Citigroup (C): Another financial institution mentioned for its investment potential.
• Tangible Book Value: A financial metric used to assess a company's value.
• Share Buyback Plan: A corporate action where a company repurchases its own shares.
• S&P 500: A stock market index representing 500 of the largest publicly traded companies in the U.S.
• Earnings Beat: When a company's reported earnings exceed analyst expectations.
• Revenue Growth: The increase in a company's sales over a period.
• Margins: The difference between revenue and costs, indicating profitability.
• Bottom-Up Price Target: An estimated future stock price based on individual company analysis.
• Secular Bull Market: A long-term upward trend in stock prices.
• Hawks: Refers to individuals or entities advocating for tighter monetary policy (higher interest rates).
• Huntington Ingalls Industries (HII): A company discussed for its role in defense and national security.
• General Dynamics: Another company mentioned in the context of naval shipbuilding.
• Revenue Backlog: The total value of contracts that a company has secured but not yet fulfilled.
• Ventas (VTR): A real estate investment trust (REIT) focused on healthcare properties.
• Net Operating Income (NOI): Income generated from a property after deducting operating expenses.
• Senior Living: A segment of the healthcare real estate market.
• Demographics: Statistical data relating to the population and particular groups within it.
• Baby Boomers: The generation born during the post-World War II baby boom.
• Price-to-Earnings (P/E) Ratio: A valuation metric used to compare a company's share price to its earnings per share.
• Dividend Yield: The ratio of a company's annual dividend per share to its current market price per share.

Investment Recommendations and Market Outlook

Elizabeth Evans, Managing Partner at Evans May Wealth, discusses her positive outlook on specific financial institutions and the broader market, emphasizing the importance of selective investing.

1. Financial Sector: Goldman Sachs and Citigroup

• Goldman Sachs (GS): Evans reiterates her buy recommendation for Goldman Sachs, noting its "phenomenal" breakout. She highlights that it is trading below its tangible book value, especially when compared to peers like Bank of America and JPMorgan Chase. The company's announced $20 billion share buyback plan, initiated in January, is seen as a positive catalyst for continued upside.
• Citigroup (C): Also recommended, Citigroup is viewed favorably for similar reasons of being undervalued relative to its peers.
• Key Argument: The financial sector, while needing individual company analysis, presents opportunities due to valuations below tangible book value and significant capital return programs.

2. Broader Market Performance and Earnings

• Earnings Season Strength: Evans points to strong earnings reports for the S&P 500 companies. As of the previous Friday, 91% of companies had reported, with 82% beating expectations. This strong performance has been overshadowed by concerns about government shutdowns and interest rates.
• Revenue and Margin Growth: Beyond earnings, companies are also demonstrating robust revenue growth, up 8.3%, and expanding margins by 13%. This indicates broad-based operational strength.
• S&P 500 Price Target: The bottom-up price target for the S&P 500 over the next 12 months is projected at 7,836, implying an additional 14.5% upside.
• Market Outlook: While acknowledging potential short-term volatility due to Federal Reserve communications and labor market data, Evans maintains a long-term belief in a "secular bull market" with continued upside.
• Counterpoint: Charles expresses concern about the persistent "hawks" advocating for higher interest rates, suggesting a potential political motivation.

3. Defense and National Security: Huntington Ingalls Industries (HII)

• Investment Thesis: Evans highlights Huntington Ingalls Industries (HII) as a strong play in defense and national security.
• Duopoly in Naval Shipbuilding: HII, along with General Dynamics, holds a duopoly in U.S. Navy shipbuilding, constructing both nuclear and non-nuclear vessels, including submarines and all 31 aircraft carriers.
• Operational Improvements and Backlog: The company has a history of improving operations and expanding margins. It boasts a significant revenue backlog of $56 billion, supported by strong government spending.
• Performance and Upside: HII has outperformed the broader market by a 6-to-1 ratio since September, and Evans believes there is still further upside.
• Key Argument: Strong government contracts, operational efficiency, and a critical role in national defense provide a solid foundation for HII's continued growth.

4. Healthcare Real Estate: Ventas (VTR)

• Business Model: Ventas (VTR) is a healthcare REIT that acquires, owns, and operates healthcare-related properties.
• Senior Living Focus: 71% of its Net Operating Income (NOI) is derived from senior living facilities.
• Growth Projections: Double-digit NOI growth is expected over the next several years.
• Demographic Tailwinds: The increasing number of Baby Boomers, who are projected to spend four times the national average per capita on healthcare, creates a strong demand for senior living.
• Valuation and Dividend: VTR is trading at a P/E ratio below 20 and offers a dividend yield of 2.5%, making it attractive relative to its peers with potential for upside.
• Key Argument: Favorable demographics and a strong position in the senior living market support Ventas's growth prospects and attractive valuation.

Conclusion

Elizabeth Evans maintains a positive outlook on select financial stocks like Goldman Sachs and Citigroup, citing their attractive valuations and capital return plans. She also sees significant upside in the broader market, driven by strong corporate earnings and revenue growth, despite potential short-term volatility. For specific sector plays, she recommends Huntington Ingalls Industries for its defense capabilities and Ventas for its exposure to the growing senior living market, supported by favorable demographic trends. The overarching theme is the importance of selective investing in identifying companies with strong fundamentals and clear growth catalysts.