Financials took S&P 500 leadership in August, and traders see continued strength in two stocks - CNBC

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Financials led the market in a red-hot rally in August.

The sector gained 5% last month, narrowly edging out communications services as the top performer of the S&P 500.

"The financials have been incredibly strong. The interest rate situation is very beneficial," Danielle Shay, director of options at Simpler Trading, told CNBC's "Trading Nation" on Tuesday.

The spread between the U.S. 10-year yield and 2-year, which impacts banks' profitability, has widened to roughly 110 basis points, far higher than a year earlier.  

"More importantly, companies like JPMorgan and Goldman Sachs … they've been doing really well on their investment side. You've had a lot of retail traders come into the market. Obviously, the stock market's been incredibly, incredibly strong this year so they also have some added benefits there as well," said Shay.

Shay highlights JPMorgan as one stock exhibiting strength in the space and targets a move up to $175 in "the next month or so." The shares traded Wednesday just above $160.

Nancy Tengler, chief investment officer at Laffer Tengler Investments, prefers a different name.

"JPMorgan is one of our largest holdings, but I would actually go with Goldman Sachs," she said during the same interview. "Goldman has about 38.5% of their revenue coming from noninterest income, much lower than JPMorgan, but they have a lot more levers to pull in terms of trading revenue and asset management as well as wealth management and investment banking."

Goldman Sachs posted its strongest revenue ever in its investment banking segment in the first and second quarters of this year, bolstered by activity in the IPO market. The company also reported earnings and revenue above expectations.

"Although JPMorgan has those aspects as well, we think Goldman is in a position of many years of underperformance, recent outperformance, a huge dividend increase from $1.25 to $2 a share," Tengler said. "If you hold it, you certainly hang on, you wait for dips to step back in."

Disclosure: Laffer Tengler Investments holds GS and JPM.

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Financials took S&P 500 leadership in August, and traders see continued strength in two stocks - CNBC
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