Financial exchange traded funds (ETFs) are down this morning after a bad earnings report from Goldman Sachs (NYSE: GS) surprised investors and analysts. Is there any reason to fear that this sector’s recovery is only a pipe dream?

The earnings were mixed:

  • Goldman Sachs was by far the worst earnings reporter this morning, stating that fourth-quarter profit slid 52% and revenue fell more than expected.
  • Wells Fargo (NYSE: WFC) fared better: net income rose 21%in the fourth quarter.
  • U.S. Bancorp (NYSE: USB) was even better than that: profit rose 64% in the fourth quarter, which the bank attributed to writing off fewer bad loans.

Obviously, Goldman is the drag here. Despite the solid earnings posted by Wells and U.S. Bancorp, they’re both down sharply today. iShares Dow Jones U.S. Financial Services (NYSEArca: IYG) is down more than 1.5% this morning. Goldman is just 5% of the fund; Wells Fargo accounts for 11%.

Financial Select Sector SPDR (NYSEArca: XLF) is down 1.4%; Wells is 8.9% and Goldman is 4.6%.

Is there any reason to fear that these results could put a stop to the financial sector’s rally over the last few months?

Goldman blames the decline in revenue on stronger competition, which cut into some of its businesses – particularly in the profitable trading area. Analysts say that for Goldman to get back to where it was, it’s going to have to be more active in the markets. To that end, the bank is planning a major overseas expansion. [Why Financial ETFs Are Standing Tall.]

Where the banks are today is a far cry from where they were two years ago. They’ve cut expenses, it’s a rising interest rate environment, which spells profits for banks and makes them more comfortable to lend. Conversely, as the economy improves, consumers and businesses will become more comfortable borrowing.

The fundamentals are there, so there’s no reason to think that this is the end of the financial sector’s rally off the lows. But just in case, have your exit strategy handy to put a cap on downside risk.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.