Market Insights: 🏦 Financials: The AI Boom’s Overlooked Winner

🏦 Room to Run: A Look at Where the Financial Sector Could Go

The AI capex boom is getting all of the attention, but behind that flurry of spending is an entire corner of the market that many are overlooking: Financials. 

Three key factors underpin the sector’s medium-term potential: a steepening yield curve, heightened IPO activity, and surging business spending together could boost financial stocks and ETFs higher.

Of course, these conditions could change, but for now, the market appears distracted from the powerful fundamentals developing in the Financial sector. 

This week, we’ll:

• Explore the reasons why Financials could be a good trade into year-end.
• Weigh the risks inherent in the sector.
• Identify if these supportive factors are secular or cyclical.

🎧 Would you prefer to listen to these insights? You can find the audio version on our Spotify, Apple Podcasts or our YouTube! (Released by 5pm Monday AEST).

This week's Market Insights is a 7.5 minute read! Full article here

Quote of the week

"It's a business that can be a very good business, when run right. There's no magic to it. You just have to stay away from doing something foolish. It's a little like investing. You don't have to do anything very smart. You just have to avoid doing things that are ungodly dumb."

Warren Buffett

What Happened In The Markets This Week?

Here’s a quick summary of what’s been going on:

📈 Nvidia crosses $5 trillion as BATMMAAN stocks dominate the market (Sherwood)

• Nvidia just crossed the $5 trillion market cap after CEO Jensen Huang teased $500 billion in AI chip orders and rolled out new partnerships with Palantir, Uber, and CrowdStrike.
• With Nvidia, Broadcom, and the rest of the BATMMAAN gang now owning 40% of the S&P 500’s market cap, buying an index fund like SPY is basically a bet on AI.
• Nvidia’s gravity-defying rally shows how concentrated the AI trade has become. Broadcom has even outpaced it YTD, up 64%, proving this isn't just a one-chip wonder.
• Microsoft and Meta dipped post-earnings despite solid growth, as Azure’s outage and Meta’s expense warning spooked investors. Alphabet jumped 8% after a $100B revenue quarter and strong AI-fueled cloud growth.
• If you're indexing, you're betting on AI whether you like it or not.

✂️ Fed cuts rates again, but Powell raises doubts about easing at next meeting (CNBC)

• The Fed cut rates to 3.75-4% and announced an end to Quantitative Tightening (QT), but Powell’s “not a foregone conclusion” comment on any December rate cut spooked markets.
• Diverging votes show growing tension inside the Fed, with Trump’s appointee pushing for faster cuts while others want a pause.
• The cut comes as the Fed flies blind on key data, with most economic reports frozen by the government shutdown.
• Markets pared gains as traders slashed odds of a December cut from 90% to 67%. Still, looser policy and QT’s end are tailwinds for equities and credit.
• The rate cut is in, but Powell’s tone hit pause on the “cut” party. Keep an eye on the data, that is, if it ever comes back.

To see our take on these market stories below, simply check out the full article!

• 🤝 Trump, Xi Set to Formalize Trade Truce After Months of Chaos (Bloomberg)
• 🇰🇷 South Korean markets smash records as investors bet on AI and corporate governance reforms (CNBC)
• 💰 OpenAI lays groundwork for $1 trillion IPO valuation (Reuters)

Now let’s dive into the main piece!

🏦 Why Financials are Banking on Growth  

Financial institutions are the pipes and valves beneath today’s once-in-a-generation AI buildout. At the same time, accommodative monetary policy and increased dealmaking are letting money flow freely.

Here’s a rundown of how these three factors could push Financials higher in the coming months. 

📈 1. A Steepening Yield Curve is Good for Financials

Fed rate cuts have started. Since September, the Federal Open Market Committee (FOMC) has now cut the federal funds rate by 25 basis points twice, bringing it to 3.75% – 4.00%. 

The FedWatch tool from CME now assigns a probability of 75% that the Fed will cut an additional 25 bps in December. That’s down from 91% odds prior to the Fed’s FOMC meeting on Wednesday.  

Source: CME Group - FedWatch Tool

So, why does all of this matter?

The answer: These cuts could be the catalyst needed to reset the financial sector’s multiple to a higher number. The cuts, if they happen as expected, could steepen the yield curve, which is typically a good environment for Financials. 

Financial stocks may be next in line to benefit as the curve steepens,

IPOs return, and capex keeps flowing.

We break down what could extend the move and what could derail it.

So our full piece covers:

🚀 IPO momentum: where activity is building and who benefits.

🏗️ Capex-financing flywheel: loans, bonds and fees tied to AI buildout.

🧭 Secular vs cyclical: signals that today’s tailwinds could persist.

⚠️ Key risks: rates, regulation and credit to monitor before sizing up.

💬 Join the discussion by leaving a comment!

Before year-end, which Financials would you want to own if capex, deals and policy stay aligned?

Key Events During the Next Week

Tuesday

• 🇦🇺RBA Interest Rate decision
  • ⏸️ Forecast: 3.6% Previous: 3.6%
  • ▶️ Why it matters: No change keeps policy tight; wording on inflation/housing could move AUD and short-term yields.

Thursday

• 🇦🇺 Balance of Trade
  • ⬆️ Forecast: $6.2B Previous: $1.825B
  • ▶️ Why it matters: A larger surplus signals stronger exports and can support the AUD and miners.

• 🇬🇧 BoE Interest Rate Decision
  • ⏸️ Forecast: 4% Previous: 4%
  • ▶️ Why it matters: The vote split and tone guide the path for cuts and can move GBP and gilt yields.

Friday

• 🇨🇳 Balance of Trade
  • ⬆️ Forecast: $97B Previous: $90.45B
  • ▶️ Why it matters: A wider surplus points to firmer exports and commodity demand—important for EMs and metals.
    
    
• 🇨🇦 Unemployment Rate
  • ⬇️ Forecast: 7.1% Previous: 7.2%
  • ▶️ Why it matters: A small drop suggests a firmer job market, which can reduce BoC cut odds and lift CAD and short-term yields.

Here are some of the biggest stocks reporting next week:

• Berkshire Hathaway
• Palantir
• AMD
• Shopify
• McDonald’s
• AppLovin

Until next week, invest well.

Simply Wall St