Regional Banks Are Emerging as Sleeper Trade of Q3 - State Street SPDR S&P Regional Banking ETF (ARCA:KRE

After months in which artificial-intelligence winners dominated investor attention, equity markets are broadening. Crowded trades are losing momentum while investors search for ways to participate in that trend.

With higher interest rates still looming under new Federal Reserve Chairman Kevin Warsh, financials are among the beneficiaries of the rotation. The largest U.S. banks set the tone in second-quarter earnings, with JPMorgan Chase, Goldman Sachs, Bank of America. and Morgan Stanley among the firms benefiting from stronger dealmaking, active trading desks and resilient consumers.

All six major U.S. banks beat Wall Street’s second-quarter profit expectations, with some analysts and investors describing the scale of the beats as extraordinary.

Yet that mega-cap strength has not lifted all boats. Regional-bank ETFs — the SPDR S&P Regional Banking ETF (NYSE:KRE) and the iShares U.S. Regional Banks ETF (NYSE:IAT) — still lag. Their discount is rooted in the 2023 crisis that brought down Silicon Valley Bank and rattled confidence across the industry.

XLF vs KRE vs IAT weekly chart. 2020-Present; Source: TradingView