Financial Sector Breaks Out to ATH s as the Fed Holds Rates Firm

Banks Reclaim the Spotlight

The financial sector has staged a notable turnaround this summer after lagging much of 2026. Through late July, the Financial Select Sector SPDR Fund was up roughly 4% for the year, but July alone contributed a 6.2% rally, its strongest month since January 2025, and the fund closed at a record high on July 28. The move has been fueled by a stronger than expected second quarter earnings season, with JPMorgan Chase, Goldman Sachs and Morgan Stanley all posting solid results driven by resilient fee income and a pickup in capital markets and trading activity. At the same time, investors have been rotating out of previously high flying artificial intelligence and semiconductor names as concerns over AI capital expenditure sustainability and private credit stress have started to ease, pushing capital back toward more traditionally valued financial names.

The Federal Reserve remains a central factor for the sector. At its July 29 meeting, the Fed held its benchmark rate steady at 3.50% to 3.75% for a fifth consecutive meeting, in a 9 to 3 vote. Three regional presidents dissented in favor of a hike rather than a cut, reflecting a notably hawkish tone under new Fed Chair Kevin Warsh. Elevated inflation, tied partly to higher energy prices, has shifted market pricing toward the possibility of one or two rate hikes later this year rather than further cuts. A hawkish repricing like this could support net interest margins for lenders, but it also raises the risk of tighter financial conditions weighing on loan growth down the line. Keep an eye on lingering geopolitical risk tied to the Middle East, which briefly rattled bank stocks earlier this year and could resurface as a wild card.

What the market has done

• The market has been in a downtrend since the start of the year, with the decline bottoming out in April.
• Since the April low, the market has trended higher in a block step manner, building value at successively higher ranges.
• By the end of July, the market was able to revisit its previous all time high set before the outbreak of the Middle East war, a move that coincided with a broadly stronger earnings backdrop and improving risk appetite for cyclical, rate sensitive names.
• Most recently, the market imbalanced up out of July's value area, clearing Auction Block 2, and closed above it, a move that lines up with the sector coming back into favor as the Fed's extended pause and solid bank fundamentals gave buyers the confidence to press the market higher.

What to expect in the coming weeks

• The key level to watch is the 705 area (July VAH) and 701.75 (July VPOC).
• Bullish Scenario
• If buyers are able to step up bids and defend the 705 area, or if there is a deeper probe to 701.75 followed by a quick reclaim back above 705, expect a move up toward 721.70, the current all-time high.
• If the market is able to accept above that level, expect a continuation move to make fresh all time highs toward the 730 and 740 areas.
• A possible trigger for this scenario would be a softer than expected inflation or labor market data release, or dovish commentary from a Fed speaker, that leads markets to price out the odds of a hike, encouraging continued rotation into rate sensitive financial names.

Neutral Scenario

• If buyers are not able to sustain a move above 721.70, the current all time high, but are still willing to defend the 705 area, expect a two way auction to develop between these levels as the market works to establish value at a higher range.
• A possible condition supporting this scenario would be mixed economic data that keeps the Fed on hold without offering a clear signal in either direction, leaving traders reluctant to commit to a breakout or a breakdown.

Bearish Scenario

• If buyers fail to hold bids at the 705 area, expect the market to return into July's value area, down toward the 692 area, which lines up with July's value area low and Auction Block 2.
• If buyers fail to respond at that level, expect a further move down toward the 680 area, aligned with June's value area high, the upper end of Auction Block 1.
• A possible trigger for this scenario would be a hotter than expected inflation or economic data release, or hawkish commentary from a Fed speaker, that leads markets to price in higher odds of a rate hike, or a renewed escalation of tensions in the Middle East that sends investors back into risk off positioning.

Conclusion
Putting it together, the financial sector's technical structure remains constructive as long as the 705 to 701.75 zone holds, with a break and acceptance above 721.70 opening the door to fresh all time highs into the 730 and 740 areas. Fundamentally, strong second quarter bank earnings and a rotation of capital away from crowded AI and tech positions have given the sector real support, but a Fed that now sounds more open to hiking than cutting, combined with lingering geopolitical risk, means the path higher may not be a straight line. Where do you see the financial sector heading from here, and are you watching the 705 level as closely as the Fed's next move?

Disclaimer: Past performance is not necessarily indicative of future results. Trading futures involves substantial risk of loss and is not appropriate for all investors. This content is intended for informational and educational purposes only and does not constitute trading advice or a solicitation to buy or sell any futures contract. Trade your own plan and manage risk.

Acronyms:
C - Composite
w - Weekly
m - Monthly
VA - Value Area
VAH - Value Area High
VAL - Value Area Low
VPOC - Volume Point of Control
LVN - Low Value Node
LVA - Low Value Area
HVN - High Value Node
HVA - High Value Area
SP - Single print
ATH - All time high