Market Update: Q2 earnings season: keep overweight in Financials to diversify IT and Communications exposure

Highlights: The Q2 US earnings season has been much better than markets expected and should help support equity market momentum. The strong showing of IT and Communications has become a bit of a habit, but some investors may not be aware of the strong results in the Financials sector or lack sufficient exposure to it. A steeper yield curve, increased capital markets and M&A activity and deregulation support banks’ fundamentals and should offset any concerns over economic growth. We maintain our overweight in Financials to diversify IT-heavy portfolios, to tap into cheap valuations and to benefit from income from dividends and share buybacks.

• Earnings momentum gathers across global banks: Q2 earnings brought robust surprises for banks globally, driven by upbeat fee income, cost control, and easing concerns over loan losses. Analyst revisions have been positive, especially in the US, where capital strength remains intact. Europe’s largest banks posted their best results in years, signalling a durable earnings recovery that is gaining depth and breadth across the sector
• Favourable macro and regulatory tailwinds: Despite a mild growth slowdown ahead, some more policy clarity, AI-driven investment, and industrial re-shoring should support US credit demand and loan growth. A steeper yield curve should sustain healthy net interest margins. Also, lower financing costs should continue to revive capital markets activity, particularly M&A and refinancing, boosting fee income potential. Regulatory momentum is also constructive, with proposals to ease capital requirements. As policy attention turns toward financial innovation, large-cap banks with global footprints and agile capital deployment stand to benefit from the next wave of reform
• Financials as strategic diversifiers: In a market heavily skewed toward tech leaders and growth stocks, financials are making a timely comeback. Despite this year’s gains, the sector remains attractively valued. With rising dispersion but generally strong fundamentals, they are well-positioned to deliver attractive risk-adjusted returns amid evolving market dynamics
• We maintain a selective overweight in global financials, favouring quality banks over insurers. We continue to like select US financials with exposure to global capital markets. We see upside for valuation multiples in Europe and Asia and look for income from dividends and share buybacks around the world