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Why the bank earnings are a big deal for the market

A bevy of big banks is set to report earnings on Friday and next week, and equity strategist Matt Maley of Miller Tabak will closely watch whether they can propel the popular XLF financial ETF above its recent highs.

The XLF, which tracks the S&P 500's financial sector, closed Thursday trading just 1.1 percent below the record highs set at the beginning of March.

"Even though they've rallied a lot lately, they have not broken above their March highs — they've kind of been trading in a sideways range — and if they can break out to new highs, that's going to be very positive," Maley said Thursday on CNBC's "Trading Nation." "We want to see if the bank earnings can be a catalyst for that kind of a move."

The banks, which make up the largest share of the XLF, got some welcome news recently when each one passed the Federal Reserve's annual stress test, clearing the way for greater returns to shareholders in the way of larger dividends and buyback programs.

But Maley points out that the spread between short-term yields and long-term yields remains at historically low levels, even after widening recently. This spread is important for the banks, which tend to borrow in the short-term and lend in the long-term, meaning they profit from a larger yield differential, or a "steeper" yield curve.

"If it can continue to widen out, that's going to be positive for the banks," Maley said. "So that, plus the earnings report should be important to see whether the bank stocks can break out over the near term."

Maley added: "If they can do that, and if the earnings can be a catalyst of that breakout, it will give investors the kind of confidence in the financial system that has been lacking ever since the 2008 crisis."

The financial sector, meanwhile, is the S&P 500's second-largest, behind information technology.

On Tuesday before the open of trading, Bank of America and Goldman Sachs are set to report earnings; Morgan Stanley and U.S. Bancorp are expected to report before Wednesday's bell. Wells Fargo, JPMorgan and Citigroup are set to report before Friday's opening bell.

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Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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