We don’t get sustainable bull markets in America without financials.
Go back and study every major advance. When banks, brokers, and asset managers are participating, the market structure is healthy.
When they’re not, problems tend to follow.
That’s why what just happened matters.
Large-cap financials just closed yesterday at their lowest levels relative to the S&P 500 in more than five years. Not weeks. Not months. Five years.
If this is just a short-term shakeout, fine. Bull markets rotate all the time.
But if leadership is leaking out of one of the most important sectors in the world, that’s not a small crack. That’s structural.
And when divergences start piling up, we pay attention.
Let’s take a closer look.
Another Key Divergence
If this were an isolated issue, we could dismiss it.
But it isn’t.
The divergences have been stacking up since last month. We’ve been documenting them here in Everybody’s Wrong.
And now we have another one that’s hard to ignore.
Small-cap financials hit new multi-year highs earlier this month.
At the very same time, large-cap Financials are rolling over to fresh eight month lows:
Same sector. Same economy. Completely different message.
That kind of split should make you pause.
Financials are not just another group on the board. In the U.S. and around the world, they are the transmission mechanism for growth.
When credit expands and capital flows freely, financials tend to lead. When they struggle, it often shows up elsewhere soon after.
We’ve seen this movie before. Financials have a history of cracking early ahead of broader market corrections.
So the question becomes simple.
Is this just rotation within the sector?
Or are the big banks quietly warning us that something larger is brewing?
Let’s dig into the relative damage.
Financial Bellwethers at Five-Year Relative Lows
Here’s the part that really matters.
The Financial Sector Index Fund (XLF) just closed at its lowest level relative to the S&P 500 Index Fund (SPY) since 2020.
That’s not noise. That’s a five-year relative breakdown in what’s arguably the most important sector in the U.S. stock market:
When large-cap financials are underperforming this badly for this long, it’s rarely random.
If this reverses quickly, we can chalk it up to rotation. Bull markets digest gains. Leadership shifts. That’s normal.
But if this relative breakdown persists, the implications become much more serious.
Historically, this is the kind of deterioration you see before major sell-offs get underway, not after.
Financials tend to weaken early when liquidity tightens or when credit conditions start to shift beneath the surface.
When we talk about looking for cracks in the market, this is not a hairline fracture.
Holding below those 2024 relative lows would suggest something more structural is taking place.
So now it comes down to one thing.
Do these bellwethers recover and reassert leadership?
Or are they quietly confirming that the risk environment is changing?
That’s where we turn next.
Something for Everyone
Here’s the good news.
We don’t own any large-cap financials in our TrendLabs portfolios. I don’t have a direct horse in this race.
But we do have exposure to equities. And whether this breakdown in financials resolves higher or accelerates lower will matter for most of the rest of the board.
If you’re bearish and think 2026 is setting up to punish complacency, this relative breakdown in XLF vs the S&P 500 is exactly the kind of confirmation you’ve been waiting for.
On the other hand, if you believe this is simply rotation and that the next leg higher eventually takes the S&P 500 north of 8,000, then you want to see a sharp recovery in that ratio. You want financials back in the driver’s seat.
There’s something here for everyone.
But we’re not in the business of guessing.
We follow trends. Period.
If capital continues to leak out of risk and financials fail to recover, we’ll respect that message and position accordingly.
If this is just another shakeout and new leaders continue to emerge while financials regain their footing, we’ll lean into that strength.
Our job is not to be right about a narrative. Our job is to interpret price.
Bull markets don’t thrive without financials.
If they come back, the structure is intact.
If they don’t, this is not just another crack.
It’s the tell.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs