As bank earnings approach, a market anomaly emerges

As bank earnings approach, a market anomaly emerges

Earnings season kicks off next week, and as usual, the big banks lead off. Here's what the tape is telling me going in: for the past four weeks, financials' relative rotation versus the broad market has been improving. Information technology — the market's leader for as long as anyone can remember — flattened out four weeks ago and has been weakening over the last three. Relative strength doesn't arrive overnight; it tends to develop over time, and sometimes it provides false signals (watch the accompanying video, and I'll show you what I mean). But capitalizing on it does require some anticipation and potential catalysts, and we're about to get a few. The Financial Select Sector Index trades at roughly 15.5 times forward earnings — about a turn and a quarter cheaper than where it stood in 2024. Is that the cheapest financials have ever been? No. But this is a group that has tripled adjusted earnings per share over the past decade. If forecasts get marked up following this season's results — and improving credit, capital markets activity, and net interest dynamics suggest they could — that multiple looks increasingly attractive. The hot trade over the past two years has been AI, and as we've seen, it's a stock-picking exercise. You have to identify the winners and losers. Broadly, of late, hardware's been the winner, and software and services have been the losers. Financials, meanwhile, are a bit simpler: if the economy is doing well, they generally are too. Technology's AI narrative requires you to correctly handicap which companies will capture the spend, how big it will be, how...