Financial Sector: Pullback Opportunity or Warning Sign?

Key Points

• While the overall market has seen a steep selloff, financials (XLF ETF) have outperformed, declining just 3.4% YTD versus nearly 9% for the S&P 500.
•  Prominent names like JPMorgan, Wells Fargo, Morgan Stanley, and BlackRock beat earnings expectations, but CEOs warned of macro risks, including tariffs, inflation, and slowing economic growth.
• The sector may offer value with solid earnings and attractive valuations, though near-term caution is warranted as volatility and policy uncertainty remain elevated.

With several major banks kicking off earnings season last Friday, the financial sector is back in focus. After a double-digit correction from 52-week highs, investors are likely wondering whether now is the time to consider buying or if more downside lies ahead.

The recent selloff in global equities, triggered significantly by the administration's sweeping new tariffs, has rattled markets across the board. And while few sectors have been spared, financials have managed to hold up relatively well compared to the broader market.

So, let’s examine closely how the sector’s top names performed last week, what their earnings say about the broader picture, and whether this pullback could be a buying opportunity.

Financials Correct but Show Relative Strength

The Financial Select Sector SPDR Fund NYSEARCA: XLF,  a popular ETF tracking the sector, is down 3.4% year-to-date and 11.3% from its 52-week high. In comparison, the S&P 500 has dropped nearly 9% YTD and about 13% from its highs. That makes financials one of the stronger areas in a market dominated by fear and volatility.

After Friday's earnings from several sector giants, including Wells Fargo and JP Morgan, XLF rallied 1.6%, ending just below its 200-day simple moving average. A reclaim of that level could suggest buyers are stepping back in and that a higher low is forming, a potential sign of renewed strength.

However, some analysts have recently noted that while tariffs may not directly impact financial institutions, the secondary effects on consumer behavior and corporate spending could weigh on future growth and loan activity.

Big Banks Kick off Earnings Season

Several key holdings in the XLF ETF delivered earnings Friday, offering insight into the sector’s resilience and outlook:

JPMorgan Chase NYSE: JPM reported Q1 EPS of $5.07 vs. estimates of $4.64 on revenue of $45.31 billion. CEO Jamie Dimon cautioned about “considerable turbulence” ahead, citing tariffs and inflation, deficits, and geopolitical uncertainty. While the beat was strong, his words and tone suggested the bank remains cautious about near-term risks.

Remove Ads

BlackRock NYSE: BLK posted an EPS of $11.30, beating expectations by $0.46, though revenue of $5.28 billion missed estimates. AUM rose to $11.58 trillion. CEO Larry Fink said the tariff announcements “went beyond anything I could have imagined,” warning of short-term volatility hurting fee revenue as clients pull back.

Wells Fargo NYSE: WFC delivered an EPS of $1.39, beating forecasts, though revenue declined 3.4% year-over-year. CEO Charlie Scharf echoed caution, expecting "continued volatility and uncertainty," but reaffirmed the bank’s readiness for a slower 2025 economic backdrop.

Morgan Stanley NYSE: MS topped estimates with Q1 EPS of $2.60 and revenue of $17.74 billion. Equity revenue surged 45% year-over-year to a record $4.13 billion, driven by strength in prime brokerage and derivatives. The bank highlighted strong client activity, especially in Asia, despite the volatility.

Opportunity with a Cautious Lens

Despite the sector’s correction, financials are still outperforming the broader market and showing signs of resilience. With solid earnings beats and strong activity across trading desks, the recent weakness could present an opportunity for the long-term investor, especially if XLF reclaims key technical levels. 

Current valuations of the sector, including JPM's P/E of 11.5, MS's 12.6, and WFC's 11.2, might be attractive to the long-term value investor and further the sector's appeal relative to its current positioning.

However, caution remains warranted in the short term, as many of the above-named company CEOs outlined. The impact of tariffs, rising volatility, and slowing global growth could weigh on bank fundamentals over the coming quarters. For investors, this may be a moment to watch closely, not necessarily rush in, but to consider potentially building exposure gradually if the relative strength persists.