Financial stocks, particularly banks, could be entering a stronger phase of performance as investors increasingly look beyond the technology sector and rotate towards less crowded areas of the market, according to Principal Asset Management.
Christian Floro, Market Strategist at Principal Asset Management, said sentiment towards financials had been overly negative since the start of the year, despite the sector beginning to rebound in recent months.
With financials remaining relatively under-owned, the sector could have further room to gain as investors seek companies with improving fundamentals and less crowded positioning.
“Banks are the clearest expression of that opportunity,” Floro said, noting that the sector offers both diversification and exposure to the broader economic benefits of the artificial intelligence (AI) investment cycle.
Banks Set To Benefit From AI Spending
While technology companies have been the primary beneficiaries of the surge in AI investment, Floro said investors may be overlooking the potential second-order benefits accruing to banks.
Banks are expected to facilitate a significant portion of the financing required for the next phase of AI infrastructure investment.
Principal Asset Management estimates that nearly US$2 trillion in AI capital expenditure could be deployed over the next two years, with much of the spending expected to be funded through debt facilitated by banks.
This could provide banks with an additional earnings opportunity as AI-related investment expands beyond technology companies and into infrastructure, power, data centres and other supporting industries.
Combined with a more constructive earnings backdrop, the development could allow banks to participate more meaningfully if equity market leadership continues to broaden beyond technology.
Technology Still Leads, But Gap Is Narrowing
Market performance since the start of 2026 highlights the sharp divergence between technology and financial stocks.
Technology significantly outperformed the S&P 500 during the first seven months of the year, at one point reaching about 24% above the benchmark before ending July roughly 11% higher.
Banks, meanwhile, initially lagged after a weak spring but subsequently rebounded to finish July about 4% above the S&P 500.
The broader financial sector remained weaker for most of the period but also recovered towards the end of July, ending around 5% below the S&P 500.
The relative performance suggests that financials have begun to recover even as technology continues to dominate market leadership.
Opportunity From Broader Market Leadership
Floro said the combination of improving fundamentals and relatively subdued investor positioning could make financials an increasingly attractive area should market leadership broaden.
For investors, banks offer exposure to an industry where market sentiment has lagged underlying fundamentals while providing a counterweight to an equity market that remains unusually concentrated in technology.
“If leadership continues to broaden, banks should be well-positioned to participate, and potentially lead, the next phase of equity market performance,” Floro said.
The outlook suggests that financials, particularly banks, could emerge as beneficiaries of the next stage of the AI-driven investment cycle rather than merely serving as a source of funding for technology exposure.
