XLF, Financials Slip on Mixed Earnings, CPI Report

The Financial Select Sector SPDR Fund (XLF), a broad ETF that tracks U.S. financial stocks, was under pressure Tuesday as mixed financial sector earnings and inflationary fears weighed on the minds of equity investors.

Wells Fargo & Co. (WFC) reported earnings that included a downward revision to its net interest income (NII) outlook for the remainder of 2025. This came despite a relatively upbeat earnings report from JPMorgan Chase & Co. (JPM).  

The market’s reaction, with XLF down nearly 1% in midday trading, reflects increasing fears of stagflation—an environment characterized by rising inflation and a slowing economy.  

Reinforcing these fears, the latest Consumer Price Index (CPI) reading for June came in slightly higher than consensus and hotter than May’s reading. Although it was in line with expectations, higher inflation highlighted the challenges financial institutions may face in the months ahead.

Wells Fargo’s NII Outlook: A Warning Signal for Financials

Wells Fargo’s second-quarter earnings revealed a key concern for bank investors: a declining outlook for net interest income, which is the core revenue source for most traditional lenders. The bank now expects lower NII for the rest of 2025, citing a combination of softening loan demand and expectations that interest rates could fall in the second half of the year.

This outlook hit WFC stock hard, sending shares down more than 5% on the day, and weighed on other bank stocks as well.  

Even though interest rates remain relatively high now, banks like Wells Fargo are forward-looking: They anticipate that if the economy continues to slow, the Federal Reserve will begin cutting rates, which will compress the margins they earn from lending. Meanwhile, demand for new loans is already softening as businesses and consumers pull back on borrowing in anticipation of tougher economic times.

Although JPMorgan posted solid results, supported by its diversified business mix, the broader market focused on Wells Fargo’s guidance as a bellwether for traditional lending, the backbone of many mid-sized and regional banks.  

With NII under pressure and loan growth slowing, the outlook for bank profitability is becoming increasingly cloudy.

CPI Inflation Adds to the Pressure

The pressure on financial stocks comes against the backdrop of this morning’s CPI report, which showed that June inflation accelerated to 2.7%, up from 2.4% the previous month and above economists’ expectations of 2.6%. This reinforces the idea that tariff-induced inflation, which the Federal Reserve and bond markets have been nervously watching, is starting to materialize.

High inflation on its own might be considered good for banks—especially if it keeps interest rates elevated. But the real problem is the combination of high inflation with signs that the economy is slowing, such as weakening consumer confidence, moderating wage growth and flat retail sales. That’s the definition of stagflation, and it’s a troubling environment for the financial sector.

Stagflation Hits Financials on 2 Sides

• Lending margins narrow as the Fed cuts rates to stimulate growth.
• Loan losses may increase as consumers and businesses struggle.
• Inflation-driven cost pressures can also eat into profitability, especially for banks with high operating expenses.

Stagflation’s Broader Impact on Financial ETFs Like XLF

Today’s action in XLF, WFC and other bank stocks is more than just a reaction to individual earnings reports; it’s a reflection of macro concerns. Even if some financial institutions outperform in the short term, the sector faces significant headwinds if stagflation becomes the dominant narrative for the second half of 2025.

Investors in financial ETFs like XLF must now weigh the risk that interest income has peaked and that loan demand could continue to decline amid deteriorating economic conditions. At the same time, rising inflation raises the specter of policy uncertainty, as the Fed walks a tightrope between supporting growth and controlling prices.

While the financial sector often thrives in rising-rate environments, it does not perform well when inflation rises while economic activity stalls. That’s the reality markets may be beginning to price in.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investing in ETFs involves risks, and investors should carefully consider their investment objectives and risk tolerance before making any investment decisions.

At the time of publication, Kent Thune did not hold a position in any of the aforementioned securities.