Are financials the hidden AI trade?
Or maybe not so hidden given the performance in 2025 and so far this year. The XLF financials ETF rose 13.6% led by a 23.2% return from Wells Fargo and a 21.4% return from JPMorgan Chase. A smaller holding in the ETF was Citigroup, which was up more than 70%.
The market spent 2025 obsessed with "who builds the chips." In 2026, the trade is moving to "who uses the chips to fire people." Financials will be early adopters of AI technology and that could be a big tailwind for profitability.
The XLF is up 2.7% today.
Banks have the two things AI needs to be profitable: Massive, messy data and expensive, repetitive labor.
Citi’s own research indicates that roughly 54% of roles in banking are at risk of being displaced by AI. If Citi were to cut 20-25K employees from its 230K headcount (about 10%) that would save around $2.5 billion per year, or a 12-14% in post-tax EPS.
There may also be upshots in lending and risk management. If banks can more-accurately determine who is likely to be a good/bad borrower then it could lead to far-more profitable lending.
There could be similar improvements in insurance and capital markets.
The risk right now is that markets are over-pricing in the improvement in profitability without pricing in the downside risks to lending into a broader economy that may find ways to cut 10-20% of broader employment due to AI and robotics. Rising unemployment won't be a boon for bank loans or profitability.
For now, we're on the part of the curve where all the upsides are priced in and that's likely to continue in 2026, particularly in some of the names that were cheaper coming into the year.
