Bank Stocks Cede Biggest S&P Weighting to Technology

By Elizabeth Stanton

May 21 (Bloomberg) — Bank stocks lost their position as the biggest industry group in the Standard & Poor’s 500 Index to technology companies after tumbling 31 percent since 2006.

Computer and software makers led by Microsoft Corp. and International Business Machines Corp. accounted for 16.26 percent of the benchmark for large U.S. companies based on yesterday’s closing prices. Financials, led by Bank of America Corp. and JPMorgan Chase & Co., fell to 16.19 percent.

Banks slid the most among 10 industries in the S&P 500 last year and are the worst-performing group so far in 2008, as lower U.S. real-estate prices led to losses on mortgage debt and derivatives approaching $380 billion globally.

“The earnings power of the financial sector has been impaired because of the credit crunch,” said Thomas J. Lee, chief U.S. equity strategist at JPMorgan in New York. “Technology is benefiting from a global economy that’s been expanding, particularly in emerging markets.”

As the S&P 500 has retreated 3.7 percent this year, its financial components have decreased almost 13 percent. Bear Stearns Cos. lost the most, dropping 89 percent as a run on the brokerage firm prompted the Federal Reserve to arrange a March 16 takeover by JPMorgan. The index declined 1.6 percent today.

Financial shares in the index declined almost 21 percent in 2007, their worst year since a 24 percent drop in 1990. They have plunged 31 percent since the end of 2006.

Worst-Performing

Technology shares are the fourth worst-performing industry group in 2008, sliding 5.9 percent. Last year, when only financial and consumer discretionary shares slipped among the 10 industries, technology had the fourth-biggest gain, 16 percent.

The 92 banks, brokerages and mutual fund managers in the S&P 500 reported an 81 percent decline in earnings in the first quarter, the third straight drop from year-earlier levels, according to data compiled by Bloomberg. Profits for the 62 of 71 technology companies that had reported as of May 19 increased 19 percent. Technology earnings haven’t declined from a year-earlier quarter since 2002.

The S&P 500 is the benchmark for large U.S. companies with a median market value of $12.2 billion. It was created in 1957 when existing indexes were combined. Managers of a combined $1.2 trillion measure their performance against it, according to Howard Silverblatt, senior index analyst at Standard & Poor’s.

Energy, the best-performing sector this year with a gain of 11 percent, passed health care in December to become the third- largest group for the first time since December 1990. Energy accounted for 14.89 percent of the index as of yesterday’s close.

Energy’s Advance

The gains for energy have been led by oil and natural gas exploration and production companies including EOG Resources Inc. and Apache Corp., which both closed at records yesterday. The price of crude oil has doubled in the past year and settled at a record $129.07 a barrel yesterday. Natural gas has almost doubled in two years.

Energy companies made up almost half the income growth reported by S&P 500 companies in the first quarter. The 36 companies reported an average 28 percent gain in first-quarter profit, the biggest of the index’s 10 industry groups, data compiled by Bloomberg show.

“Energy’s benefiting from growing scarcity of production vs. demand,” Lee said. “Over time, its market weight will equal its earnings weight.” JPMorgan estimates energy will account for 18 percent of the earnings of companies in the index this year.

Financials have been the biggest industry group in the S&P 500 every month since February 2002, according to Standard & Poor’s. During that time, technology has been second largest, except for July 2002 through April 2003, when health care was bigger in eight of the 10 months.

Financials first became the top group in December 1995, when they unseated consumer discretionary companies. Financials were surpassed by technology in December 1998, and technology was dominant every month through February 2001. From March 2001 through January 2002 the two groups alternated as biggest.

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