What's Wrong With The Banks?

1.) INFLATION – US Headline Inflation came in at 3.8% vs. the prior data point of 3.3%. Estimates were for 3.7%... so there’s the acceleration that makes investors who don’t pay attention to the rate of change (RoC) nervous. No news here if you’ve been watching rates and commodities with us. The US 10YR Yield is at 4.43%, up from 4.32% one month ago. Again, an acceleration that will make those not paying attention to RoC nervous. Our broad commodity exposure is up +29% over the last 3 months and +8.8% over the last one month. Oil is up +2.6% this AM, but still below what would be a lower high of $106.90. Could we see that in Oil? Shorter-term signals suggest yes. As a consumer… that’s not great. As an investor, those accelerations are to be enjoyed as risk assets tend to respond positively to growth and inflation accelerating together.

2.) BANKS – What they’re doing relative to the rest of the stock market is something we’ve not seen before. Yesterday, the S&P 500 Financials ETF (XLF) closed at the lowest levels in history relative to the S&P 500 itself. Some of the biggest and most important financial institutions in the world – names like JPMorgan Chase (JPM), Goldman Sachs (GS), Visa (V), Mastercard (MA), Morgan Stanley (MS), and Bank of America (BAC) – are underperforming the broader stock market more than they ever have before. Historically, healthy bull markets usually have participation from financials, and banks sit at the center of the economy because credit drives everything. Now, before everybody starts running around screaming recession, collapse, crisis, financial contagion, or whatever scary word gets the most clicks this week, let’s slow down for a second. We can’t look at this in isolation. We have to look at trends, participation, leadership, relative strength, absolute strength, sentiment, positioning, all of it together. And here’s the key to this “relative” weakness… Relative weakness and absolute weakness are not the same thing. Something we see over and over across global markets is that the indexes with more technology exposure keep outperforming the ones with less. And that is showing up clearly in Financials. Financials don’t have any technology stocks in their sector index, by definition. The S&P 500, meanwhile, is now pushing toward a 36% weighting in Technology alone. So part of this historic underperformance from Financials isn’t necessarily because banks are collapsing. It’s because they’re competing against the strongest secular trend in the market during the middle of an AI arms race. There’s a huge difference between “financials are weak” and “technology is unstoppable.” While banks are lagging the S&P 500, the actual bank stocks themselves are still doing just fine. The S&P Bank ETF (KBE) just closed April at new all-time highs (second chart). If the banking system were truly cracking beneath the surface, you probably wouldn’t see bank stocks making fresh highs. You’d see failed breakouts, expanding credit stress, and aggressive selling. Instead, we simply have a sector that can’t keep up with tech.

3.) OVERHEATED – Not yet. Of course, there’s lots of commentary about this rally overheating the market in general. I understand why some might think that. But that’s not what we see if you look beneath the surface. Even after this big rally, the market is still trading more than one standard deviation below its long-term regression trend. Profitability and valuation are tightly linked. Forward profit margins explain about 64% of the variation in forward Price to Earnings ratios. P/E ratios for the S&P 500 and broader market are currently elevated by historical standards but show mixed recent trends. They’re mostly stable to modestly contracting on a forward basis as earnings estimates rise.