Red-hot earnings have traders the most bullish on banks in years -- and that's huge for the stock market

Wall Street really knocked it out of the park this quarter, and traders have taken notice.

In the wake of better-than-expected results for JPMorgan, Goldman Sachs, Bank of America, Citigroup and Morgan Stanley, they’re positioning for further upside in the sector — a development that signals merrier times ahead for an equity bull market well into its ninth year.

Short interest — a measure of bets that share prices will drop — on an exchange-traded fund tracking financial stocks in the S&P 500 is sitting near the lowest level in at least three years, relative to outstanding shares available to loan, according to IHS Markit data.

And while that bullish stance likely reflects expectations that Federal Reserve rate hikes will boost interest income for major lenders, recent moves in the indicator suggest that this quarter’s earnings are also driving sentiment.

XLF short interestIHS MarkitFinancial sector shorts are close to the lowest in at least three years.

So what does this mean for the broader market? Data from Goldman Sachs suggests that the bullishness could bode well for stocks at large.

Dating back to the start of the 8 1/2-year bull market that kicked off in March 2009, Goldman finds that financial firms contributed the second-biggest portion of share gains to the S&P 500, out of the 11 major industries. And while tech has been the heaviest contributor, financials’ presence in the stock market elite is arguably more impressive, given how rock-bottom interest rates have slowed lending income.

If traders are to be believed, the best is still to come for financial stocks, with the aforementioned ETF hitting a 10-year high amid the earnings bonanza. Stay tuned.

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