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tech stocks outperform the banks

Article By: ,  Financial Analyst
May 2, 2017 7:21 AM

If you thought Donald Trump was set to be a friend of the major US banks, think again. Their underperformance on Monday was triggered by comments President Trump made to Bloomberg about the potential to break up big banks. This sent banks’ share prices lower at the start of the week, and gave the S&P 500’s tech sector the chance to overtake the banking sector, as you can see in figure 1 below.

Banks stumble after Trump election surge

Figure 1 shows the performance of these two important sectors’ of the US stock market over the past year, the chart has been normalised to show how they both move together. As you can see, after Donald Trump’s election victory in November US banks outperformed the tech sector. However, after peaking in late March, the banks have seen their lustre start to fade, this has allowed the tech sector to outperform the banks, which could be the start of tech dominance in the US equity market.

Political fortunes intrinsic to stock market success

The divergence in stock market performance highlights the divergence in political fortunes for the two sectors. Donald Trump’s stance towards the banks appears contradictory. On the one hand he has been talking about cutting red tape and reducing the regulatory burden on banks’, which has pleased many in the Republican Party. On the other hand, he has now said that splitting up investment and consumer banks and reinstalling the Glass-Steagall act is on the table, which is something Trump voters’ supported during his Presidential campaign. “Trump rhetoric” risk may have receded in the first 100 days of his Presidency, but it hasn’t disappeared completely, and now it could be the banks’ turn to take a hit from the whims of the President.

In contrast, the tech sector is reaching fresh record highs, with the Fangs – Facebook, Apple, Netflix, Amazon and Google (Alphabet) – all outperforming in recent weeks. Apple is set to release Q1 results later today, which could see a significant improvement in YoY metrics, which could ease concerns about slowing China sales, the market will also be looking for some positive forward-looking guidance that could help to propel Apple’s share price even higher.

Momentum trade favours tech sector over financials

The tech sector is in the middle of a powerful momentum trade, in part boosted by Trump’s tax plan that could help firms like Apple repatriate overseas profits back to the US, leading to an increase in dividends and share buybacks for Apple and other firms, which is helping to boost performance in the tech sector. In contrast, momentum seems to be fading for the banking sector, which could be plunged into chaos if yet another US administration wants to see the banking sector broken up.

What a strong tech sector means in practice

If tech is set to become the king of the S&P 500, then the fortunes of companies like Apple could be key to the overall performance of the US indices. After reaching a record high on Monday, Apple’s market capitalisation is now over $700bn, if this momentum trade continues and Trump’s tax plan gets the go ahead from Congress then Apple could become the first trillion dollar US company. Thus, outperformance of tech could be a key long-term theme for financial markets.

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