U.S. Financial Sector Surges 6.3% in July to Record High; September Rate Hike Expectations Emerge as Key Wildcard
Claire Weston
U.S. financials rose 6.3% in July as the XLF ETF hit an all-time high, driven by blowout big-bank earnings and a sector rotation into value; but a hawkish Fed signal has pushed September rate-hike odds to 63.2%, making monetary policy the key test for whether the rally can last.
How big was July's rally — and what drove it?
The S&P 500 financials sector gained 6.3% in July, the second-best among all 11 sectors, trailing only energy at 11.7%.
The Financial Select Sector SPDR ETF (XLF) closed at a record $57.60 on July 28, up 6.2% for the month — its best month since January 2025.
Three forces converged: big-bank Q2 earnings broadly beat expectations, M&A and IPO activity picked up, and fears around private-credit risk and AI disruption to finance faded.
How strong are the fundamentals?
FactSet data show S&P 500 financials posted 19.4% year-over-year earnings growth and 12.6% revenue growth in Q2, with profit margins ranking third among 11 sectors.
JPMorgan, Goldman Sachs, and Morgan Stanley all reported strong results, with trading, capital-markets, and investment-banking lines improving across the board.
State Street chief investment strategist Michael Arone noted that financials still trade at a 30%-plus discount to the broad market. This means → the earnings improvement has not yet been fully priced in, and room for catch-up remains.
What is the technical picture signaling?
The financials-to-S&P 500 relative price ratio broke above a 15-month downtrend line. In plain terms = financials have stopped underperforming the market, and a new cycle of relative strength may be starting.
The SPDR S&P Bank ETF (KBE) rallied 9.7% over the past two months and hit its own record high earlier in July.
Piper Sandler chief market technician Craig Johnson named financials a preferred sector, citing a breakout in XLF's ratio versus the Philadelphia Semiconductor Index. This reflects a continuing rotation out of former leaders like chips and into value sectors such as financials.
What are institutions saying?
Edward Jones investment strategist Brock Weimer said: "I think this month's rally is well-supported."
He pointed to improving M&A and IPO activity, benign credit conditions, and bank dividend and buyback programs as additional tailwinds.
State Street upgraded its financials rating from neutral to positive. This means → mainstream firms are shifting from "wait and see" to "add exposure."
Why is the Fed rate-hike outlook the biggest wildcard?
On July 29 the Fed held its benchmark rate at 3.5%–3.75% for a fifth straight meeting, but three voting members backed a 25-basis-point hike, and Chair Kevin Warsh signaled that tightening may be needed.
XLF fell 2.2% on the day and recovered only 0.6% the next session — the sharp swing underscored how rate-hike expectations can undercut the bull case for financials.
CME FedWatch data show the market-implied probability of a September hike has risen to 63.2%.
Is a rate hike good or bad for banks?
If short-term rates fall faster than long-term rates, the yield curve steepens — widening net interest margins (the spread between what banks earn on loans and what they pay on deposits). In plain terms = the bigger the gap between short and long rates, the more banks earn from "borrowing short and lending long."
But if the Fed actively hikes and deposit costs rise faster than loan yields, that margin-expansion logic breaks down. This means → the direction of rates matters less than *which end moves first and by how much*.
Whether financials can convert July's technical breakout into sustained sector leadership hinges on upcoming inflation data and the Fed's actual policy path.
Content is for reference only, not financial advice.