Financials Hit Record Highs as the AI Trade Unravels—Can They Keep Leading?

Key Points

• Financial stocks have hit new highs and outperformed the broader market as technology and semiconductor shares corrected sharply over the past month.
• JPMorgan Chase and Bank of America both posted strong second-quarter earnings beats, hit fresh highs, and trade at relatively modest valuations with growing dividends.
• Financials have become a key support for the broader market, and any reversal in the sector could weaken market breadth and hurt the S&P 500.

While fear and panic have gripped the AI trade and broader technology sector, one corner of the market has recently made new 52-week highs. The Financial Select Sector SPDR Fund NYSEARCA: XLF recently touched a fresh all-time high of $57.60 before easing back into the mid-$50s.

Over the past month, as semiconductor stocks and the broader AI complex corrected hard, financials stocks have gained close to 5.5%. That kind of relative strength, at a moment when the market's former leaders are struggling, is exactly the type of rotation worth paying attention to.

Why the Money Is Moving Here

The outperformance experienced in recent days and weeks is not random. Q2 earnings season delivered blowout results across the big banks, with JPMorgan NYSE: JPM, Bank of America NYSE: BAC, and Goldman Sachs NYSE: GS all beating estimates. Wall Street's investment banks have been riding a wave of IPOs and megadeals, and the AI buildout itself has become a fee machine for the banks financing it. Several reports have recently framed the group as overlooked beneficiaries of the AI trade, and that framing is catching on. There’s also a slightly defensive aspect attached to the sector. With capital swiftly heading out of mega-growth technology names, it’s been reallocated to more defensively valued pockets of the market, such as the financials, staples, and healthcare sectors.

After several years in which capital crowded into richly priced technology names, banks trading near 14 times earnings while growing profits and raising payouts look like a reasonable place to rotate. And out of the entire sector, two heavyweights stand out for their recent relative strength and results.

JPMorgan: Record Highs With a $1 Trillion Milestone in Sight

Like the broader sector, JPMorgan Chase recently hit a new all-time high near $360 and is up roughly 9% year to date. The company now has a market cap of almost $926 billion, keeping the first-ever $1 trillion valuation for a U.S. bank within reach. The Q2 report on July 14 set the tone and spurred the upward momentum, with revenue of almost $58 billion and earnings per share (EPS) of $6.14, comfortably topping expectations.

Despite recently hitting new highs, the stock is still fairly cheap. It trades at just 14.8 times earnings with a consensus Moderate Buy rating across 28 analysts and a price target of $358.67. JPMorgan scores in the 87th percentile of MarketBeat's MarketRank, and possesses an attractive 1.74% dividend yield. As long as the stock holds its prior breakout spot near $340, it could continue to lead the market and its sector.

Bank of America: The Cheaper Heavyweight With a Fresh Dividend Hike

Bank of America has been the stronger performer of the pair this year, up almost 11% year-to-date and close to 27% over the past 12 months. And like the sector and JPM, it recently made a new high at $62.99 last Friday. Its recent Q2 report, released on July 14, beat across both EPS and revenue. Notably, the consumer unit earned nearly $3.3 billion as CEO Brian Moynihan noted consumer spending continues to hold up. The bank followed it with a 14% dividend increase to 32 cents per share, announced last week and payable in September.

At a forward price-to-earnings (P/E) of about 13, BAC is the cheaper of the two heavyweights, and MarketBeat's MarketRank actually scores it higher than JPMorgan, in the 95th percentile of all finance stocks. The consensus is Moderate Buy across 27 analysts, with the consensus price target implying over 3% upside potential. Like JPM, its income component adds another layer of appeal to owning the stock, with a 2.1% yield and an 11-year track record of dividend growth.

The Caveat That Matters

Now, the recent outperformance is notable, but it comes with a condition. Bank stocks dropped from their record highs on Tuesday ahead of the Fed meeting, and followed through to the downside on Wednesday.

More importantly, financials have become one of the few pillars supporting the broader market as technology corrects. If the sector were to flip and lose key support levels, the spillover would matter well beyond the banks themselves. Breadth could weaken meaningfully, and the S&P 500 could begin playing catch-up to the hard-hit technology sector rather than being cushioned by financial strength.

For now, the trend is intact and the earnings back it up. But the group's leadership has quietly become a market-level variable, making the coming weeks worth watching closely, both for financials bulls and for everyone else.ss