Suddenly, it seems like everything is going right for financials. After underperforming for much of this year, financial stocks are now running away as a group, with just about every corner of the sprawling industry offering something compelling for investors. Over the past three months, the State Street Financial Select Sector SPDR ETF (XLF) jumped more than 13%, while the State Street SPDR S & P Bank ETF (KBE) climbed 13%. Compare that with the S & P 500, which has gained just about 5% over the same time period. Some of the recent outperformance has to do with a rotation into lagging stocks. Financials in June were underperforming by the most since coming out of the Covid pandemic, according to data from Truist Wealth. Some strong earnings out of the gate last month from the country’s largest banks added to conviction in the sector. A steepening in the yield curve, easing hostilities between the U.S. and Iran, as well as the prospect of a less taxing regulatory environment also added to the momentum. The recent streak of gains could mean the group is due for a breather in the near term. But ultimately, many investors are confident that positive trends supporting the group still make it a compelling buy. “We remain overweight,” said Keith Lerner, investment chief at Truist Wealth. “And we still think there’s ultimately more upside in the group.” Bull market Of course, financials aren’t the only part of the market that’s caught a bid in recent weeks. The S & P 500 has surged to all-time highs, after last month’s tech rout cleared the market of some of its excesses, namely in semiconductors. The equal weight S & P 500 is outperforming, with health care also rallying. Small caps have outpaced large caps as well. A number of Wall Street firms have raised their targets, with many now expecting the broader index will end the year at 8,000 or higher . That’s from the index traded Wednesday, with almost five months left in the year. A historically strong earnings season has been pointed to as the main reason investors are so bullish, and also the reason why many expect that the next AI play could be somewhere in the real economy as opposed to the hyperscalers or the chip stocks. “I think investors will continue to look for other areas to kind of ballast when tech is out of favor,” Lerner said. “And I think financials is a bit of a sweet spot for that.” Winners and losers In such an environment, there could be a greater dispersion between the winners and losers going forward, even within financials. Banks have been the best-performing segment within the group, rallying 19% over the last three months, with insurance the second best performing group, up 14%. Gerard Cassidy, head of U.S. bank equity strategy at RBC Capital Markets, expects banks could continue to outpace the broader market, possibly rising another 10% to 20% over the next 12 months. Within banks, he thinks that regional banks have the strongest upward trajectory. He likes U.S. Bancorp , Fifth Third Bancorp , PNC Financial Services Group , and M & T Bank — all of which have already risen more than 20% this year. Cassidy rates all four outperform. Insurance companies, meanwhile, have done well thanks to higher rates. Alternative asset managers, which have come under pressure this year amid fears of private credit exposure, have surged this week — especially in the aftermath of Goldman Sachs, BlackRock, Blackstone, KKR, Apollo Global, and Brookfield saying they will raise $500 billion, possibly more, for the construction of new AI factories. Apollo shares are up 10% just this week. To be sure, there is the risk that the group could be derailed, especially if inflation stays high, forcing the Federal Reserve to embark on a rate hiking campaign that could slow the economy. But for now, that is not the consensus of those on the Street, who think that the outlook for the sector is bright.
