Financials Lag Market as Bank Earnings Loom
XLF falls 1% while the S&P 500 rallies 3%. Banks face a tough setup heading into Monday's earnings with rate uncertainty and geopolitical risk.
The market just had its best week since November. Financials missed the party.
While the S&P 500 surged 3.1% on ceasefire relief, the Financial Select Sector SPDR (XLF) dropped 1.09%. Regional banks fared worse—KBE fell 1.19%, KRE shed 1.30%. It was the widest underperformance gap between financials and the broader market since March.
The timing is awkward. JPMorgan, Goldman Sachs, and BlackRock report earnings starting Monday, kicking off what should be a pivotal week for the sector.
The Divergence
| Index/ETF | Weekly Change |
|---|---|
| S&P 500 | +3.1% |
| Nasdaq | +4.2% |
| XLF (Financials) | -1.09% |
| KBE (Banks) | -1.19% |
| KRE (Regionals) | -1.30% |
Financials are down 10% year-to-date—the worst-performing sector in the S&P 500. What looked like a value opportunity in January has become a value trap.
Why Banks Sold Off During a Risk-On Week
Several forces worked against the sector:
Yield curve dynamics: The 10-year Treasury yield fell 18 basis points as oil prices collapsed. Lower long rates compress net interest margins—the spread banks earn between deposits and loans. The curve is still inverted, but it's less attractive for bank earnings than it was a week ago.
Fed rate path uncertainty: Cleveland Fed President Beth Hammack warned that rate hikes remain possible if inflation hits 3.5%. But if the ceasefire holds and oil stabilizes, the Fed might stay on hold indefinitely. Banks are stuck in the worst-case scenario: rates too low to juice margins, but not low enough to spark loan demand.
Credit quality concerns: Consumer delinquencies ticked higher in Q4 2025. Credit card charge-offs at major banks rose 15% year-over-year. Regional banks carry commercial real estate exposure that hasn't fully worked through the system.
Earnings Setup
The big banks report over the next three days:
| Company | Report Date | EPS Estimate | Revenue Estimate |
|---|---|---|---|
| BlackRock (BLK) | April 14 | $12.01 | $6.62B |
| Goldman Sachs (GS) | April 14 | $11.84 | $12.9B |
| JPMorgan (JPM) | April 15 | $4.62 | $42.8B |
| Citigroup (C) | April 15 | $1.38 | $20.4B |
| Wells Fargo (WFC) | April 15 | $1.12 | $20.1B |
Expectations are mixed. BlackRock should post record assets under management above $14 trillion on market gains. Goldman's trading desk likely benefited from volatility around the Iran conflict. JPMorgan remains the bellwether for consumer credit and overall banking health.
What to Watch
Net interest income guidance: How do CFOs see margins evolving if the Fed stays on hold? Last quarter's commentary was cautious. If guidance comes down again, the stocks will sell off regardless of headline beats.
Investment banking commentary: M&A activity picked up in Q1 after a slow 2025. Deal pipelines matter for Goldman and Morgan Stanley. If CEOs sound bullish on corporate dealmaking, that's a positive signal for the sector.
Buyback announcements: Banks passed stress tests last year with flying colors. Most have authorization to repurchase shares. At current valuations—JPM trades at 11x forward earnings—aggressive buybacks would signal confidence.
Credit reserves: Any increase in loan loss provisions will spook the market. Banks have been releasing reserves for two years. A reversal suggests management sees trouble ahead in consumer or commercial portfolios.
Technical Picture
XLF tested support at $48 three times since February and held each time. The RSI dipped below 30 in mid-March—textbook oversold territory—and has since recovered.
If banks beat and guide higher this week, XLF could rally toward the 200-day moving average at $54. But a miss or cautious guidance likely sends the ETF back to test $48 support again.
The Contrarian Case
Financials haven't been this cheap relative to the market since the 2020 pandemic panic. Price-to-tangible-book sits at 1.4x for the KBW Bank Index, compared to a 10-year average of 1.8x.
If you believe the ceasefire holds, oil stabilizes, and the Fed eventually cuts, banks are the obvious rotation target. The yield curve normalizes, credit fears fade, and multiples expand.
That's a lot of ifs. But at these valuations, the risk-reward is starting to favor the patient.