Tech vs Financials – the Yin and the Yang

Tremendous article by Josh Brown today on Second Chances. Couldn’t let it pass:


In the 1990’s the two sectors moved together and at one point in the early 2000’s, both sectors together comprised close to 50% of the market cap of the SP 500. (Tech at its peak was 33% of the market cap of the SP 500, and while I didn’t see the graphic, and before Real Estate was spun out of the SP 500 in 2015 or 2016, you’d have to think Financial’s in the early 2000’s were at least 17% of the SP 500 by market cap.)

The pundits used to call the Financial sector the “market general’s” and as the Financials went so went the overall stock market.

Not so much today: at present there is a substantial divergence between Technology and Financials year-to-date.

As of last Friday, March 15th, Technology (XLK) was outpacing the Financial ETF (XLF) 18.14% vs 12.36%, and that was before the two sectors put further distance between comparable returns this week.

Bespoke highlighted it tonight in the Thursday evening, “Bespoke Sector Snapshot”.

the Technology sector has been leading the charge.  The sector is now up 20.5% year-to-date, and it needs to gain just 1.5% to make new all-time highs.  Its relative strength versus the S&P 500 has shot higher this month to a point where it is outperforming more than it has at any other point over the last year.  This comes as nearly all other sectors have seen their relative strength stall out.  At this point, though, price has gotten back up to extreme overbought levels, so it might take another round of consolidation before it can make that final push to new highs.

The Financial sector, on the other hand, has really struggled this week as interest rates have traded lower.  The sector now has the weakest breadth out of the eleven major sectors with just 51% of its stocks above their 50-day moving averages.  We did see the Financial sector test and hold support at its 50-day moving average today, so for now, the technicals haven’t completely broken down.

Here is what’s interesting though: if we look at IBES by Refinitiv data (SP 500 earnings data), Financials are expected to have a much stronger year than Technology.

Here is the quarter by quarter earnings growth expectation for each sector as of IBES data today:

  • Q1 ’19: Financials +3.4%, Technology -6.3%
  • Q2 ’19: Financials, +7.3%, Technology -5.4%
  • Q3 ’19: Financials, +7.7%, Technology -3.1%
  • Q4 ’19: Financials, +20.4%, Technology, +6.5%

The expected y/y growth rate of 20.4% for Financial’s would normally be met with skepticism, but note the expected strength in Tech in Q4 ’19.

Realistically, the Street consensus as it stands now thinks that Q1 ’19 will be the low point for these two critical sectors for 2019.

Maybe that’s why we have the market we have.

Anyway, just thinking out loud.

Something will have to give with Financials shortly: either the long end of the Treasury yield curve will widen or the short-end will fall.

Thanks for reading.

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