Sexual selection on male coloration has been implicated in the evolution of colourful species flocks of East African cichlid fish. During adaptive radiations, animals diverge in multiple phenotypic traits, but the role of physiology has received limited attention. Here, we report how divergence in physiology may contribute to the stable coexistence of two hybridizing incipient species of cichlid fish from Lake Victoria. Males of Pundamilia nyererei (males are red) tend to defeat those of Pundamilia pundamilia (males are blue), yet the two sibling species coexist in nature. It has been suggested that red males bear a physiological cost that might offset their dominance advantage. We tested the hypothesis that the two species differ in oxidative stress levels and immune function and that this difference is correlated with differences in circulating steroid levels. We manipulated the social context and found red males experienced significantly higher oxidative stress levels than blue males, but only in a territorial context when colour and aggression are maximally expressed. Red males exhibited greater aggression levels and lower humoral immune response than blue males, but no detectable difference in steroid levels. Red males appear to trade off increased aggressiveness with physiological costs, contributing to the coexistence of the two species. Correlated divergence in colour, behaviour and physiology might be widespread in the dramatically diverse cichlid radiations in East African lakes and may play a crucial role in the remarkably rapid speciation of these fish.