After a long period of underperformance, financial stocks are falling Bank of America (NYSE:BAC), American Express (NYSE: AXP) and JPMorgan Chase (NYSE: JPM) are finally recovering. In fact, it has been since the beginning of June State Street Financial Select Sector SPDR ETF (NYSEMKT: XLF) – a tradeable indicator for the entire sector – rose more than 8% while the S&P 500 has hardly changed. That’s a sharp contrast to the stocks that have led the market for so long. The Roundhill Magnificent Seven ETF (NYSEMKT: MAGS) is actually down nearly 4% over the same period, held back by alphabet And Microsoft.
XLF data from YCharts.
Did you miss Nvidia 2009? This rare signal flashes again. In 2009, a “double down” signal flashed for a little-known chip maker called Nvidia. For the first time in years, the same “Total Conviction” signal is flashing for a company one hundredth the size of Nvidia. Carry on”
Connect the dots. Investors are trading their artificial intelligence (AI) holdings for money-related tickers.
It’s not particularly difficult to understand why. The question is whether this rotation away from more aggressive growth stocks and toward less exciting financials will last.
Table of Contents
Driving forces
There are a handful of factors at play here, all contributing to the rotation.
The most important of these forces is interest rates. Although the base fed funds rate is actually down from its peak of more than 5% in 2024 and is currently just over 3.5%, it is still higher than it has been for most of the last 17 years and is now expected to remain “higher for longer” than expected just a few months ago.
In fact, this is arguably the biggest catalyst for the turnaround in these stocks that occurred early last month. While the fed funds rate has fallen compared to two years ago, market-based interest rates on mortgages, autos and credit card debt have not fallen as much over that period. This means banks and other lenders benefit from greater profit margins on their loans because their cost of capital is measurably lower compared to the cost they charge borrowers.
In other words, banking is more profitable today than ever before and will remain so for the foreseeable future.
We are already seeing this dynamic in the industry’s recent results. For example, Bank of America’s net interest income rose 9% year-over-year in the first quarter due to lower revenue growth.
It would also be naive to suggest that AI stocks, once must-buys at almost any price, have fallen at least somewhat out of favor. Ohthe AI revolution is certainly still in full swing. It wasn’t quite as revolutionary – or even as practical for everyday use – as initially expected.
The story continues
Yet most of the industry’s big names still plan to spend hundreds of billions of dollars on AI infrastructure this year alone, with no clear guarantee that this spending will be justified in the long term. Out of caution, many investors are quietly reducing some of their exposure to AI technology stocks and looking for undervalued, safer investments like JPMorgan and Bank of America. The former trades at just 15 times expected earnings, while Bank of America shares are dirt cheap with a forward price-to-earnings (P/E) ratio of just over 13, underscoring the high value for most of the financial sector.
After a short dry spell, initial public offerings (IPOs) and takeovers are now higher than they have been for a long time. Although Ernst & Young (EY) notes that the total number of global IPOs fell slightly in the first half of 2026, the total amount of company capital raised in the first half of 2026 increased by more than 200% year-on-year, led by SpaceX‘s latest record-breaking IPO.
This underwriting, of course, generates fee income for the investment banks that sponsor these public offerings.
Looking ahead
But will this recent uptrend – or its fundamentals – last?
Mostly yes.
Interest rates could last longer than recently expected. However, the Federal Open Market Committee, which largely sets the tone for all market-based interest rates, still expects base rates to gradually decline somewhat through 2028. In theory, this has a detrimental effect on lenders as profit margins on lending shrink.
In reality a slow, measured A decline in the fed funds rate does not necessarily lead to a reduction in lending margins. Borrowers can be more than happy with interest rates that are simply slightly lower than today. And as long as the domestic or global economy doesn’t slip into recession any time soon (and the New York Federal Reserve now says there’s only a 16% chance of that happening within the next 12 months), such pressure on profit margins could be offset by continued economic growth that boosts credit demand. To that end, EY expects U.S. gross domestic product (GDP) to grow a useful 1.8% this year before rising to 1.9% next year. Meanwhile, the International Monetary Fund (IMF) expects global GDP to rise 3% this year and then accelerate to 3.4% in 2027. That’s a level of economic strength that can really strengthen banks’ bottom lines.
Image source: Getty Images.
As for the capital markets sector, IPOs from major AI companies such as OpenAI and Anthropic are on the radar, although it is difficult to predict the number or scale of mergers and acquisitions (M&A) or public offerings. Then there are the smaller ones, but they are also more numerous. These potential IPOs include Databricks, Canva and Shein, although continued economic strength often also results in multiple unexpected IPOs.
Although 2026 is likely to be a record year for the capital markets, which will be difficult to surpass in 2027, the coming year should still be a good year for the investment banking business.
So yes, the renewed strength in the financial sector is likely to continue, led by investment banks and lenders that haven’t performed particularly well of late – as long as the economy remains reasonably healthy.
Should you buy Bank of America stock now?
Before you buy Bank of America stock, consider the following:
The colorful fool Stock Advisor The analyst team has just identified what they think this is The 10 best stocks so investors can buy it now… and Bank of America wasn’t one of them. The ten stocks that made the cut are designed for long-term growth and could deliver huge returns in the years to come.
Think about when Netflix created this list on December 17, 2004… if you have $1,000 invested at the time of our recommendation, You would have $398,160!* Or when Nvidia created this list on April 15, 2005… if you have $1,000 invested at the time of our recommendation, You would have $1,249,202!*
This performance is why people listen. With a track record of beat the S&P 500 by four times, Stock Advisor offers a clear advantage. Don’t miss the latest top 10 list, available with Stock Advisorand join a long-term investor community.
See the 10 stocks »
*Stock Advisor returns as of July 15, 2026.
Bank of America is an advertising partner of Motley Fool Money. JPMorgan Chase is an advertising partner of Motley Fool Money. American Express is an advertising partner of Motley Fool Money. James Brumley holds positions at Alphabet. The Motley Fool has positions in and recommends Alphabet, American Express, JPMorgan Chase and Microsoft. The Motley Fool has one Disclosure Policy.
Money is suddenly converted into financial stocks. Here you can find out what drives him – and whether the move is permanent. was originally published by The Motley Fool
https://finance.yahoo.com/markets/stocks/articles/money-suddenly-rotating-financial-stocks-102000911.html
