Key Points
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Profit margins on lending are remaining higher than expected.
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After being pent-up for years, several major companies are raising funds by going public.
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Investors are increasingly wary of most AI stocks and are seeking more reliable performers.
- 10 stocks we like better than Bank of America ›
After a long stretch of subpar performance, financial stocks like Bank of America (NYSE: BAC), American Express (NYSE: AXP), and JPMorgan Chase (NYSE: JPM) are finally rallying. In fact, since the beginning of June, the State Street Financial Select Sector SPDR ETF (NYSEMKT: XLF) — a tradeable proxy for the entire sector — is up by more than 8%, while the S&P 500 is little changed That’s in sharp contrast to the stocks that had been leading the market for so long. The Roundhill Magnificent Seven ETF (NYSEMKT: MAGS) is actually down by nearly 4% for the same time frame, held back by Alphabet and Microsoft.
XLF data by YCharts.
Connect the dots. Investors are swapping out their artificial intelligence (AI) holdings for money-related tickers.
It’s not terribly difficult to understand why. The question is, will this rotation out of more aggressive growth stocks and into less exciting financials last?
Driving forces
There’s a handful of factors in play here, all of which are contributing to the rotation.
Chief among these forces is interest rates. Although the baseline Fed Funds Rate is actually down from 2024’s peak of more than 5%, at just over 3.5% right now, it’s still higher than it’s been for the better part of the past 17 years and now projected to linger “higher for longer” than expected just a couple of months ago.
Indeed, that’s arguably the biggest catalyst for these stocks’ turnaround that materialized at the beginning of last month. While the Fed Funds Rate has fallen from two years ago, market-based interest rates on mortgages, automobiles, and credit card debt haven’t fallen as much during this stretch. This means banks and other lenders are enjoying wider profit margins on their loans, as their cost of capital compared to what they’re charging borrowers is measurably lower.
In other words, being in the banking business is more profitable now than it’s been in a while and is apt to remain so for the foreseeable future.
We’re already seeing this dynamic in the industry’s recent results. For instance, Bank of America’s net interest income rose 9% year over year in the first quarter on lower revenue growth.
It would also be naïve to pretend the AI stocks that were once must-haves at almost any price have fallen, at least somewhat, out of favor. Oh, the AI revolution is still well underway to be sure. It’s not been quite as revolutionary — or even as practical for everyday use — as initially expected.
Yet, most of the major names in the business are still planning on spending hundreds of billions of dollars on AI infrastructure this year alone, with no clear guarantee this spending will be justified in the long run. Out of caution, many investors are quietly dialing back some of their exposure to AI technology stocks and seeking undervalued safer investments like JPMorgan and Bank of America. The former trades at only 15 times forward earnings, while Bank of America shares are dirt cheap at a forward price-to-earnings (P/E) ratio of a little more than 13, underscoring deep value for most of the financial sector.
Meanwhile, after a bit of a dry spell, initial public offerings (IPOs) and acquisitions are higher than they’ve been in some time. Although Ernst & Young (EY) notes that the total number of worldwide IPOs was down slightly in the first half of 2026, the total amount of corporate capital raised during the first half of 2026 was up more than 200% year over year, led by SpaceX‘s recent record-breaking IPO.
This underwriting of course generates fee revenue for the investment banks that sponsor these public offerings.
Looking ahead
But is this recent bullishness — or its underpinnings — built to last?
Mostly, yes.
Interest rates may hold up longer than had been recently anticipated. However, the Federal Reserve’s Open Market Committee that largely sets the tone for all market-based interest rates still expects baseline rates to gradually drift somewhat lower through 2028. In theory, this works against lenders by narrowing profit margins on lending.
In reality, a slow, measured decline in the Fed Funds Rate doesn’t necessarily have to crimp lending profit margins. Borrowers may be more than satisfied with interest rates that are simply a little lower than today’s. And as long as the domestic or global economy doesn’t slip into a recession anytime soon (and the New York Federal Reserve now says there’s only a 16% chance of this happening within the next 12 months), any such pressure on profit margins could be offset by continued economic expansion that powers loan demand. To this end, EY expects U.S. gross domestic product (GDP) to expand a serviceable 1.8% this year before accelerating to 1.9% next year. Meanwhile, the International Monetary Fund (IMF) believes worldwide GDP will rise 3% this year and then pick up its pace to 3.4% for 2027. That’s a degree of economic strength that can really bolster banks’ bottom lines.
As for the capital markets sector, although it’s difficult to predict a number or amount of mergers and acquisitions (M&A) or public offerings, IPOs from big AI companies like OpenAI and Anthropic are on the radar. Then there are the lesser ones that are also greater in number. These prospective IPOs include Databricks, Canva, and Shein, although sustained economic strength often draws out several unexpected public offerings as well.
Although 2026 will likely end up being a banner year for capital markets that’s tough to match in 2027, the year ahead should still be a good one for the investment banking business.
So, yes, the newly rekindled strength in the financial sector is likely to last, led by investment banks and lenders that hadn’t been performing particularly well of late — as long as the economy remains reasonably healthy.
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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 has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, American Express, JPMorgan Chase, and Microsoft. The Motley Fool has a disclosure policy.
