spdrindex.com
From CI 11/11/2004
We’ve all known for a good while now that the bulk of S&P 500 total earnings were being generated by the financial sector. Surprise, surprise. Could it really be any other way after the greatest credit expansion ever experienced in US history? We think not. And what’s more, if you include earnings from GE financial services, GMAC, Ford Motor Credit, and the list goes on and on, “financial services” earnings of the S&P total is much higher than the specific sector defined above. For how much longer can the US economy really “live on” financial earnings? If one assumes that for all intents and purposes, the greatest bond bull market of a lifetime has already experienced a secular peak, macro financial disinter mediation (lending) by default becomes a difficult game ahead. Perhaps much more difficult. There is simply no question in our minds that the contribution of financial sector earnings to total S&P earnings contracts on a percentage basis ahead. It’s simply a matter of time. The higher short rates go while longer rates remain flat (flattening of the yield curve), the greater the squeeze on financial sector earnings. We know the Fed does not want to see longer maturity interest rates (think the 10 year Treasury) shoot up like a rocket. The unintended consequence, of course, of the flattening yield curve is financial sector margin/spread compression. And clearly given the weight of financial sector earnings of the moment, this has significant meaning to macro S&P earnings growth possibilities ahead.
Alternatively, it is also clear that, just like the financial sector, energy sector earnings as a percentage of total S&P earnings exceed the sector market cap weighting of the group. And, of course, hope springs eternal as the earnings weight of tech is far below the market cap weight. The dichotomy between the energy sector earnings and market cap weight tells us that there are still plenty of skeptics out there when it comes to the broader energy sector. In like manner, there’s probably still far too many believers in tech. Is short tech and long energy a paired trade that will continue to make sense in 2005? Again, we’ll discuss this next week when we look at the sectors that have historically performed well in the first year of each presidential cycle.
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