The financial sector, and specifically the sector ETF Financial Select Sector SPDR Fund (NYSE: XLF), has been consolidating for several months and is now approaching a significant breakout level. 

As earnings season kicks off, the sector's major players are set to report quarterly results, potentially triggering a major directional move. So, let's explore the XLF ETF's current positioning, its recent performance, and what to expect from its top holdings as they report earnings, as this could lead to a higher timeframe breakout across the board.

Consolidation Phase: XLF Nearing a Potential Breakout

The XLF seeks to provide investment results that correspond to the performance of the Financial Select Sector Index. The XLF is composed of companies from various industries, including banking, insurance, and capital markets. Its primary focus is on large-cap financial stocks, making it a key indicator of the overall health of the financial sector.

Currently, the XLF ETF is up an impressive almost 11% year-to-date. Despite these double-digit gains, the ETF has primarily traded in a major consolidation near its 52-week highs for just under four months. 

This lengthy consolidation, above rising moving averages and now consolidating near its breakout level at around $42, paints a highly bullish pattern and presents a unique setup for investors and momentum swing traders. However, as the sector edges near a potential breakout and momentum bursts higher, a critical juncture is here—earnings season—where its major players are set to report quarterly earnings, which could potentially result in a significant directional move.

Several of XLF's top holdings are reporting earnings on Friday, which could significantly influence the sector's trajectory for the quarter. Let's take a closer look at three major holdings that are set to report earnings this week and what to expect.

Earnings Impact: What to Expect from JPMorgan Chase & Co.

JPMorgan Chase & Co. (NYSE: JPM), the second-top holding in XLF with a 10.3% weighting, will have an earnings conference call on Friday, July 12th, at 8:30 AM. The financial services provider last posted its earnings results on April 12th, 2024. The firm reported $4.63 earnings per share for the quarter, beating the consensus estimate of $4.18 by $0.45. The firm earned $41.93 billion during the quarter, compared to analysts' expectations of $40.90 billion. 

For its upcoming earnings, the consensus EPS forecast for the quarter is $4.19. The reported EPS for the same quarter last year was $4.37. JPM has outperformed the sector and is consolidating near its 52-week high ahead of earnings, with a year-to-date performance of +21.95%.

Consensus EPS Forecast for Citigroup's Upcoming Earnings

Citigroup Inc. (NYSE: C), the 11th top holding in XLF with a 2.1% weighting, will report its earnings on Friday morning and hold an earnings conference call on Friday, July 12th at 11:00 AM Eastern. Previously, Citigroup reported $1.58 EPS for the quarter, topping the consensus estimate of $1.29 by $0.29. The company had revenue of $21.10 billion for the quarter, compared to analysts' expectations of $20.46 billion. Its quarterly revenue was down 1.6% on a year-over-year basis. The consensus EPS forecast for the quarter is $1.40. The reported EPS for the same quarter last year was $1.37. 

While its influence on the overall sector is less considerable than that of JPM, its overall direction can undoubtedly have an impact. Year-to-date, it's been one of the sector's top performers, up almost 30% and trading at its 52-week high.

Market Expectations: Wells Fargo's Potential Earnings Impact

Wells Fargo & Company (NYSE: WFC), the 6th largest holding in the sector ETF with a 3.6% weighting, has confirmed that its next quarterly earnings report will be published on Friday, July 12th, 2024. Wells Fargo & Company will hold an earnings conference call on Friday, July 12th, at 10:00 AM Eastern.

Previously, the banking giant reported $1.20 earnings per share (EPS) for the quarter, beating analysts' consensus estimates of $1.10 by $0.10. The consensus EPS forecast for the quarter is $1.27. The stock is trading just about 4% away from its 52-week high, up over 20% year-to-date, and trading just shy of 10% away from its all-time high.