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The firm believes the sector’s tough year will continue and does not “see the trend reversing anytime soon.”
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The Financial Select Sector SPDR Fund has gained just 0.76% year-to-date, while the SPDR S&P 500 ETF Trust has surged nearly 14% higher in the same time.
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However, the analyst said the market has likely overreacted to three stocks in the sector: LPL Financial Holdings, Fiserv, and Nu Holdings.
In 2026, U.S. equities have had a solid run, with the S&P 500, Nasdaq and Dow Jones hitting fresh highs despite geopolitical and economic uncertainty. However, the financial sector has largely underperformed the broader market.
According to Morningstar’s Sean Dunlop, sector director of financial services equity research, three names: LPL Financial Holdings Inc. (LPLA), Fiserv Inc. (FISV), and Nu Holdings Ltd. (NU) are outliers. He named these as his top sector picks.
Why Financials Have Underperformed The S&P 500
According to Dunlop, financial services have lagged because of fears of AI disruption and rising interest rates.
“It has been a forgettable year for financial services companies, with rippling concerns about artificial intelligence disruption weighing heavily on share prices” for various financial services firms, he said in a post. “Even banks saw a (short-lived) selloff as investors continued grappling with a shifting competitive environment.”
Meanwhile, “stubbornly higher inflation” led the Federal Reserve to raise interest rates for the first time since 2023 in September, further increasing pressure on the sector and leading to a “significant underperformance” relative to the broader market.
The Financial Select Sector SPDR Fund (XLF) has gained just 0.76% year-to-date, while the SPDR S&P 500 ETF Trust (SPY) has surged nearly 14% higher in the same time.
The firm believes the sector’s tough year will continue and does not “see the trend reversing anytime soon.”
The Outliers: LPLA, FISV, NU Stocks
Despite seeing the sector as overvalued, the analyst believes that the market “has likely overreacted” in the case of LPL Financial Holdings, Fiserv, and Nu Holdings.
Dunlop explained in his post that after an early-2026 selloff, LPL Financial has made progress toward returning to mid- to high-single-digit organic net new asset growth. However, the analyst noted that the company will need to “either introduce a credible alternative monetization strategy for client sweep cash, which represents 30%-35% of gross profit today but is perceived to be at risk from AI disruption, or else exhibit signs that the AI-enabled cash management risk is a non-issue.”
