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Financial Sector Peaking or Consolidating?

The second-quarter earnings season is upon us, and traders and investors are anticipating good numbers. Many are projecting the earnings for the S&P 500 Index to be up 65%. However, some expect the second quarter could be as good as it gets for economic growth as earnings growth may begin to slow into the end of the year. Although the economy's strongest growth may be behind us, S&P profits can still grow but not at the torrid pace of the past few quarters.


All eyes continue to focus on the FED, the 10-year Treasury yield (TNX), and inflation numbers. This week, the financial sector starts the earnings season off with reports coming from financial giants such as JPM, GS, BAC, C, MS, and WFC.


The financial sector is expected to outperform due to the low interest rates, increased mortgages, loans, and banking and capital markets activities.


As represented by the S&P 500 Financial sector ETF (XLF), the financial sector has gained 25.27% on a year-to-date basis, outperforming S&P 500 Index (13.29% YTD). However, there are technical signs to suggest the sector may be peaking. Yields pulled back, and the US yield curve spread has also begun to tighten after many months of steepening. For instance, the 10-year minus the 2-year yield and the 10-year minus the 3-month yield spread have narrowed. The other maturities, such as the 30-year, 10-year, and 5-year, have also broken down, near-term.


If the above trend continues, this will put pressure on the earnings of many of the financial names, including banks. However, if this is a consolidation phase, and yields rally again, and the yield curve spreads widen then financial stocks will resume their primary uptrends.


The Financial sector contains seven key industries: Banking, Capital Markets, Consumer Finance, Diversified Financial Services, Insurance, Mortgage REIT, and Thrifts and Mortgage Finance. Banking remains an influential subindustry of the financial sector, accounting for over 50% of the total market-cap weight.


Enclosed are the technical outlooks on the S&P Financial sector, Banking Index, Regional Banks, Insurance Index, Broker-Dealer Index, and key banking stocks.


Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

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