XLF hits record high as Dow rallies 624 points on rotation

The Financial Select Sector SPDR ETF (XLF) surged to an all-time high Tuesday, leading a rotation that pushed the Dow Jones Industrial Average up 624 points, or 1.2%.

"It's been a really broad-based rotation," Ross Mayfield, an investment strategist at Baird, said. "This momentum unwind has been playing out for six to eight weeks now, and it has a lot more to do with the technicals of the market than any fundamental changes."

The S&P 500 rose 0.3%, while the Nasdaq Composite edged down 0.2% as technology shares extended their recent slide. The VanEck Semiconductor ETF (SMH) fell more than 3%, its fourth straight decline, with Micron Technology losing about 10% and Advanced Micro Devices dropping 8%. The Technology Select Sector SPDR ETF (XLK) hit its lowest level since May 7. In contrast, the Health Care Select Sector SPDR ETF (XLV) also reached a record high, led by gains in insurance stocks. Sherwin-Williams rose 8% after reporting better-than-expected second-quarter results, while Coca-Cola gained nearly 5% on a top- and bottom-line beat and an upgraded full-year outlook.

Fintech stocks drove much of the financial sector's advance, with payments companies and digital lenders posting gains that pushed XLF to its record. State Street Corp., the issuer of XLF and other SPDR ETFs, reported record fee revenue, sending its shares higher and adding to the sector's momentum. The rotation out of technology into financials, healthcare, and other cyclical sectors has gathered pace over the past two months, with the Dow outperforming the Nasdaq by a wide margin during that period. For XLF, the record high signals that investors expect the financial sector to benefit from a sustained period of higher interest rates and resilient consumer spending, which support net interest margins and fee-based income for banks and fintech firms alike.

The rotation into cyclical and rate-sensitive sectors will depend on oil and interest rates staying near current levels, Mayfield said. "It's hard to make a full case for consumer discretionary or financials or industrials continuing to catch a bid if rates are heading higher across the curve and oil is pushing up toward $100 a barrel."

West Texas Intermediate crude futures fell 5% to just above $78 per barrel, while international Brent crude shed more than 6% to trade around $83, as Iran discussed the Strait of Hormuz with Saudi Arabia and Oman. Lower energy costs provided a tailwind for consumer-facing and industrial stocks, which benefit from reduced input expenses. The Federal Reserve's rate decision is due Wednesday, with fed funds futures pricing in a quarter-point hike in September, according to the CME FedWatch Tool. A pause or dovish signal from the central bank could reinforce the rotation into financials and other rate-sensitive sectors, while a hawkish surprise might reverse the move.

This article is for informational purposes only and does not constitute investment advice.