Can Financial Stocks Maintain Their Bullish Run?

“The financial sector is much more than just banks,” says DataTrek Research.

Financial stocks in the S&P 500 have outperformed the broader U.S. stock market over the past year, reflecting optimism about the economy, according to DataTrek. “Even if you’re not overweight on financials, their continued leadership reassures that equity markets are confident in further growth,” said Nicholas Colas, co-founder of DataTrek.

The Financial Select Sector SPDR Fund (XLF), which tracks financial stocks in the S&P 500, surged 31.1% over the past 12 months, outpacing the S&P 500’s 22.7% rise, FactSet data shows.

While the U.S. stock market has gained in 2024, investors are wary that the Federal Reserve’s tight monetary policy might trigger a recession. Despite this, Colas noted that the Atlanta Fed’s GDPNow model predicts solid economic growth in the third quarter, with a 2.5% estimate.

“The financial sector extends beyond just banks, which only account for 25% of the index,” wrote Colas. It also includes growth-oriented companies like Visa, Mastercard, and S&P Global, as well as asset managers such as BlackRock, Blackstone, and KKR.

Financials have continued to shine in 2024, with the Financial Select Sector SPDR Fund up 19.6%, outpacing the S&P 500’s 14.7% rise. However, Colas pointed out that while financials have outperformed by 8.4 percentage points, it’s still lower than past midcycle periods, such as 2017-18 when they led by as much as 20 points.

On Tuesday, the financial sector in the S&P 500 faced a sharp drop as banks like JPMorgan, Goldman Sachs, and Citigroup saw steep losses. Investors are now looking ahead to new inflation data, set to be released Wednesday by the Bureau of Labor Statistics.