Financial Stocks Are Flying—and They Don’t Look Ready to Stop

A Capital One cafe in Miami: The bank’s acquisition of Discover kicker will help juice upside. (Joe Raedle/Getty Images)

“Banking is very good business if you don’t do anything dumb,” according to Warren Buffett. History suggests that’s easier said than done, but that shouldn’t prevent investors from betting big on financials to outperform over the rest of the year.

Not that they’ve been underperformers in 2025. The Financial Select Sector SPDR exchange-traded fund is up about 8.5% since the start of 2025, the third-best among the Sector SPDRs, while the Invesco KBW Bank ETF is up double digits, easily ahead of the S&P 500 index. That’s not too surprising, given the continuing strength of economic data, the expectation for a less onerous regulatory environment, and the hope that the Federal Reserve will cut interest rates at some point in the coming months. Easily-passed bank stress tests and higher dividends, announced this week, also helped.

That wouldn’t be a rarity. While banks have a bad reputation—almost taking down the U.S. economy will do that—financials have actually outperformed in 10 of the past 14 years, notes Trivariate President Adam Parker, who argues investors should overweight the group. At the firm’s recent client event, he noted that sentiment “was positive toward stocks that benefit from a recovery in M&A, like Jefferies, as well as toward the shareholder return potential of Capital One post the Discover Financial merger, value-add services from bellwethers Mastercard and Visa, as well as select insurers like Progressive.”

Nor is he the only one positive on the group. In RBC Capital Markets’ midyear outlook, the firm noted it, too, is overweight U.S. financials. While JPMorgan Chase, Bank of America, and other giant institutions tend to get most of the attention, regional banks look set to benefit from a “less combative regulatory environment [that] is beginning to take shape with the appointment of new regulatory leadership,” the firm’s analysts write. “We believe these changes can lead to stronger growth, less capital and liquidity and debt requirements, and more M&A in the banking sector.”

Bargain hunters, however, may want to go smaller. Hovde Group research director Feddie Strickland notes that while banks with market values above $50 billion have the highest valuations based on price-to-tangible-book ratios, banks worth $250 million to $1 billion are the least expensive. Since Liberation Day, the valuation gap between the two has only gotten wider. Some of the firm’s Outperform-rated picks in the smallest category include Mercantile Bank, Equity Bancshares, and Provident Financial Services.

Financials, however, are far more than banks. RBC notes that the recent ruling overturning the Consumer Financial Protection Bureau $8 late-fee cap has been positive for the credit card companies, and student lending reform could be another positive. As Trivariate’s Parker noted, Capital One Financial has the Discover kicker to help juice upside, and the stock was also named a BTIG’s top 10 pick. It also has strong technical trends, with recent gains suggesting it can keep rallying into the $220 to $230 range, up 5.5% on the high end from a recent $218.

No matter what part of the industry investors favor, RBC analysts argue there’s room to be bullish. “[We have] a constructive view on demand and…one of the most bullish views on the U.S. political backdrop across all U.S. sectors,” they write. “Deregulation is a key tailwind for the sector in our view.”

And you can take that to the bank.

Write to Teresa Rivas at teresa.rivas@barrons.com