Forget Interest Rates: Bank Earnings Could Reveal the Next Catalyst for Financial ETFs

For the past two years, investors have largely viewed bank stocks and financial ETFs through the lens of interest rates.

But as second-quarter earnings begin, that narrative is changing.

Strong trading revenue, a rebound in investment banking, record IPO activity and improving commercial lending are emerging as the sector’s primary growth engines.

That narrative is beginning to change.

As major U.S. banks prepare to report second-quarter earnings this week, analysts say the sector’s biggest growth drivers are increasingly coming from Wall Street rather than monetary policy.

A revival in investment banking, record trading activity, a rebound in commercial lending and an AI-driven capital spending boom are creating multiple earnings engines for banks simultaneously, according to CNBC.

This combination could affect how investors view financial-sector ETFs heading into 2027.

Mike Mayo, banking analyst at Wells Fargo, described the current environment as a “sweet spot” for the industry, with both Wall Street and Main Street businesses growing at the same time, per CNBC.

Investment banking revenue for the largest U.S. banks is expected to jump 26% year over year in the second quarter, while trading revenue could rise 14%, according to KBW estimates.

The resurgence has been fueled by a sharp pickup in capital markets activity, highlighted by last month’s record-breaking Space Exploration Technologies Corp (NASDAQ: SPCX ), or, SpaceX IPO, alongside robust merger activity and elevated trading volumes across equities, fixed income and currencies.

At the same time, businesses are returning to the loan market as artificial intelligence-related investments spread beyond technology companies into manufacturing, infrastructure and industrial expansion.

Financial ETFs Poised to Benefit The changing earnings mix could favor diversified financial ETFs with significant exposure to global investment banks alongside traditional lenders.

The Financial Select Sector SPDR Fund (NYSE: XLF ) remains one of the broadest ways to gain exposure to the sector, with top holdings including JPMorgan Chase & Co (NYSE: JPM ), Goldman Sachs Group Inc (NYSE: GS ), Bank of America Corp (NYSE: BAC ), Wells Fargo & Co (NYSE: WFC ), Morgan Stanley (NYSE: MS ) and Citigroup Inc (NYSE: C ).

Strong trading and advisory revenues from investment banks could complement steady consumer banking results, reducing the sector’s dependence on interest-rate movements alone.

Similarly, the iShares U.S.

Financials ETF (NYSE: IYF ) offers diversified exposure across large U.S. financial institutions that are positioned to benefit from improving capital markets activity as well as commercial lending.

Investors seeking greater exposure to investment banks and securities firms may also look at the iShares U.S.

Broker-Dealers & Securities Exchanges ETF (NYSE: IAI ).

Unlike broader financial ETFs, IAI has heavier allocations to firms such as Goldman Sachs and Morgan Stanley, two of the biggest beneficiaries of the IPO revival, advisory mandates and elevated trading activity.

The fund also includes exchange operators and market infrastructure companies that tend to benefit from higher trading volumes.

Meanwhile, investors expecting commercial loan growth to broaden beyond money-center banks may consider the SPDR S&P Regional Banking ETF (NYSE: KRE ) or the SPDR S&P Bank ETF (NYSE: KBE ).

Regional lenders typically derive a larger share of earnings from commercial lending, which analysts believe could strengthen as companies ramp up borrowing to finance AI-related expansion projects, factories and infrastructure investments.

The Key Risk: Have Markets Already Priced it In? The sector’s improving fundamentals come after a strong rally in bank stocks.

KBE has gained more than 12% this year, outperforming the S&P 500’s roughly 10% advance, reflecting growing optimism around earnings.

That has shifted investors’ focus away from whether banks will post strong second-quarter results toward whether the current momentum can be sustained.

Several risks remain, including sticky inflation, a flatter yield curve, renewed competition for deposits and any slowdown in dealmaking or capital markets activity.

Even so, if investment banking, trading, commercial lending and consumer credit continue expanding together, financial ETFs may be looking at a phase driven less by the direction of interest rates and more by the breadth of banks’ earnings growth.

For ETF investors, that represents a meaningful shift in the sector’s investment thesis.

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