Technology, Financials To Drive S&P 500

Recent technical analysis is supporting what I think will be improved earnings growth in the S&P 500.

Doing this weekend’s S&P 500 Earnings Update, a thousand different articles come to mind just running through the numbers.

Here is the SP 500 by Market Cap and Earnings Weight, a table that readers see at least once a quarter:

FC – marketcapvsearningswt

Two things should jump out at readers:

1) Note how the “earnings weight” of Financial’s within the SP 500 has grown, while the market cap as a percentage of the SP 500 has shrunk. Financials are the worst-performing sector year-to-date and in my opinion remain one of the best values in terms of sectors within the S&P 500. But the flat yield curve and regulatory environment aren’t giving them much of a chance to grow earnings.

2) If you don't think Apple (NASDAQ:AAPL) is important to the S&P 500, guess again. After its last report -- one of its worst quarter’s in memory -- analysts took down their numbers. Technology’s earnings weight within the S&P 500 dropped from 24% to 19% in a period of 3 months. As a numbers geek that tracks this stuff religiously, that even surprised me. (Long Apple)

Per Factset’s weekend Earnings Insight, if Apple is excluded from the Q2 ’16 Technology sector, expected earnings growth for the sector improves to -1%,

What is a little bit less surprising but still notable is that Tech’s market cap weight is roughly the same within the S&P 500 between July ’15 and July ’16 even though Apple has declined from $135 per share to roughly $97 – $98 per share in the last 12 months.

Conclusion: This is a big week for Financials with a bunch of banks reporting late in the week. Financials and Tech are the two gorilla sectors within the S&P 500. In an article read this week, someone trumpeted that Heath Care’s market cap weight as a sector was now equal to that of Financial’s, but of notice the earnings weight, there is still a big disparity between the two. Financial’s still trumps Health Care by 450 basis points in terms of earnings weight.

In the bull market of 2013, where the S&P 500 returned better than 32% for the calendar year, Financial’s were the top-performing sector. Truly makes me wonder about the “chicken-or-the-egg” question. The flattening yield curve and the mortgage refis have to be killing a name like Wells Fargo (long NYSE:WFC). JPMorgan Chase (NYSE:JPM) should benefit in Q2 ’16 from the better high-yield credit market and the improved commodity sectors in Q2 ’16.

Because Energy and commodities bottomed in Q1 ’16 and improved throughout Q2 ’16 along with high-yield credit spreads and better bond issuance, I do think this helped take some stress off the credit/loan books of the banking industry.

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We’ll see some of the big bank/Financial’s numbers this week.

Both Tech and Financial sectors remain 35% of the S&P 500’s market cap and 40% of its earnings weight.

Written By: Brian Gilmartin