Financials aren’t just another sector. They’re the backbone of bull markets.
Sure, Technology carries the heaviest weight in the S&P 500. And, yes, Industrials historically show the highest correlation with the index.
Those are important groups with plenty of leadership names. No argument there.
But I’m old school. I’ve seen enough cycles to know: We don’t get sustained bull markets without Financials.
I had a front-row seat during the mess of 2007-09, when the banks nearly took the whole system down.
That experience cemented for me just how critical this group is – not just in the U.S., but globally.
In fact, outside the U.S., Financials are the stock market.
Most countries don’t have an Apple (AAPL), a Microsoft (MSFT), or an Nvidia (NVDA) dominating their indexes. They have banks.
Look at the MSCI All Country World Index ex-U.S. – Financials make up almost 25% of the entire global index.
For perspective, Industrials and Technology sit closer to 14% each.
That’s why, when I analyze the world’s markets, I always start with Financials.
They’re the tell. They lead. They matter.
The Global Rotation Into Financials
The S&P 500 Financials Index Fund (XLF) just closed at fresh all-time highs again. No shock there. It’s been carving out new records on repeat ever since breaking out last year.
But this isn’t just a U.S. story.
Across the pond, the European Financials ETF (EUFN) has been ripping higher too, logging all-time highs all year long.
And in Asia?
The titans of Japan – Mitsubishi UFJ (MUFG), Sumitomo Mitsui (SMFG), and Mizuho Financial (MFG) – are clocking in at levels they haven’t seen in decades.
This is no one-off. It’s a full-blown, global rotation into the largest financial institutions on the planet.
When banks everywhere are breaking out together, it’s not just noise. It’s the kind of synchronized leadership that fuels powerful bull markets.
Financials are firing on all cylinders worldwide.
Ignore that at your own risk.
Rotation Into Smaller Banks
The smaller banks still haven’t really joined the party.
One of the quirks of the U.S. financial system is just how many banks we have. There are more than 250 of them in the Russell 2000 Index alone.
Whether that sheer number has weighed on the group is up for debate. To me, it’s more of a small-cap story – the big players have been running, while the little guys have been left behind.
That’s starting to change.
Take a look at two very diversified indexes, the Regional Banks ETF (KRE), which leans heavily on smaller banks, and the S&P Bank ETF (KBE), an equal-weight basket that inevitably tilts toward the smaller names.
(That’s simply because there are so many more of them than the handful of giants such as JPMorgan (JPM)).
This week, KRE hit new six-month highs, while KBE logged fresh year-to-date highs:
That’s the kind of rotation we’ve been waiting for – and if it sticks, it could unlock the next leg higher for the entire Financials space.
Bottom Line: Banks Run The Show
We don’t get bull markets without Financials. Period.
The more bank stocks participating, the stronger and healthier the uptrend.
That’s not opinion. That’s experience.
I’ve seen a lot of cycles, and one lesson always sticks: You don’t fight strength in Financials. When banks are leading, the trend is your friend.
Yes, Technology has the biggest weight in the indexes. Sure, Industrials have the tightest correlation with the S&P. All true.
But at the end of the day? Financials make the world go ’round.
Never forget it.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs