Big Banks Lead the Rally! Buybacks + Investment Banking Recovery Lift JPM, MS, BLK — U.S. Financials Shift from Rate Trading to Earnings-Driven

I. Sector Overview: Repair and Differentiation After a Clearer Rate Path — Capital Refocuses on “Earnings Quality”

In the second half of 2026, the U.S. financial sector (XLF) has performed solidly overall. Year-to-date gains have outpaced the median of the broader market, and the sector has repeatedly reclaimed key support levels after pullbacks. Compared with the high volatility of technology and AI stocks, financials have become an important “certainty premium” destination during capital rotation. However, clear internal differentiation has emerged: large banks and payment leaders continue to strengthen, while smaller banks and some traditional asset managers still face earnings-quality tests.

Three Key Drivers:

• Clearer rate path: After finding a balance between cooling inflation and a soft landing in the labor market, the Fed’s rate-cutting pace has become more predictable. Net interest margin (NIM) pressure on large banks has eased, while unrealized losses on bond portfolios continue to be digested, stabilizing asset-side yields.
• Improved capital return capability: With regulatory pressure easing at the margin, leading banks have stepped up share buybacks and dividends. Shareholder returns have become an important support for valuation repair. Investment banking businesses (IPOs and M&A) have also seen a phased recovery as market sentiment improved.
• Credit quality remains manageable: Although consumer credit and commercial real estate pressures have not been fully resolved, large banks have ample reserves and better-than-expected asset quality. The market’s pessimistic pricing of a “hard landing” has significantly receded.

Potential Challenges: Deposit cost competition continues, regional risks at smaller banks have not been fully eliminated, capital requirements from regulators may fluctuate, and macroeconomic data volatility can still cause rate expectation swings.

Core View: The financial sector is shifting from “rate trading” to a logic driven by “earnings quality + capital returns.” Current strength is driven more by the certainty of leading institutions than by a broad sector-wide rally.

II. Core Holdings: Leading Players Remain Resilient, Structural Opportunities Appear in Sub-Sectors

1. Large Banks (Big Banks): Core Positions
   • JPMorgan Chase (JPM): The absolute leader. Balance sheet quality and comprehensive business capabilities remain outstanding. Investment banking and wealth management provide stable contributions, and capital return capability is strong — one of the highest-certainty names in the sector.
   • Bank of America (BAC): Relatively rate-sensitive, with remaining NIM recovery elasticity. Solid deposit franchise and a valuation discount versus top peers.
   • Wells Fargo (WFC): Ongoing cost control with a clear path of credit quality improvement; buyback capacity remains.
   • Citigroup (C): Transformation is still underway, but recovery in investment banking and cross-border businesses provides phased elasticity. Execution progress needs close monitoring.
2. Investment Banking & Asset Management
   • Goldman Sachs (GS) / Morgan Stanley (MS): Direct beneficiaries of capital markets recovery and wealth management expansion. Higher fee-income mix reduces earnings volatility.
   • BlackRock (BLK): Continued expansion in passive and alternative assets; lower market-beta sensitivity than traditional asset managers.
3. Payments & Fintech
   • Visa (V) / Mastercard (MA): Consumer spending resilience remains intact, and cross-border payment recovery supports long-term growth. Regulatory and competitive pressures exist, but network effects remain solid.
   • American Express (AXP): Premium consumer and small-business spending remain relatively resilient; credit quality better than market concerns.

III. Investment Strategy: Stock Selection Matters More Than Sector Selection

Long-term supporting logic:

• As the interest rate center shifts lower, pressure on bank net interest margins and bond portfolios gradually eases.
• After leading institutions improve capital ratios, buybacks and dividends become long-term sources of return.
• Light-capital businesses such as payments and wealth management still have structural growth potential.

Short-term valuation assessment: The sector has recovered from extreme pessimism and still trades at a certain discount to the S&P 500, but valuations of leading banks are no longer cheap. Going forward, focus on NIM trends, credit costs, and capital return execution.

Allocation suggestion: “Core + Satellite” strategy

• Core positions: JPM, BAC, V and other large banks and payment leaders to capture relatively stable earnings and shareholder returns.
• Satellite positions: Small positions in investment banks, regional banks, or insurance names with clear catalysts to capture phased elasticity.

Summary: In 2026, U.S. financials are no longer merely a “rate trading tool.” They represent structural opportunities driven by improving earnings quality and rising capital returns. Only companies with solid balance sheets, clear business structures, and the ability to consistently deliver capital returns are likely to continue outperforming the market.

Wishing everyone smooth trading.

Risk Warning: Rate expectation swings that pressure net interest margins, credit costs rising more than expected, renewed regulatory tightening, capital market activity falling short of expectations, and macroeconomic data volatility leading to valuation fluctuations.

Core Holdings Table