About four times a year, Wall Street forgets its obsessions — Greece, inflation, deflation, Greece — and focuses on earnings, which is what generally drive stock prices. This is one of those times. And, while all eyes will be on technology this week, you should keep watch on financials as well.
This season, tech stocks are making the headlines. Consider what happened to Google stock after it reported earnings. The stock soared 16.3% in after-hours trading Thursday as it reported $6.99 a share on revenue of $17.73 billion. Analysts expected $6.70 a share on revenue of $17.75 billion.
Apple and Microsoft report tomorrow, and the earnings report from the two arch-rivals will probably dominate the headlines. At the moment, Apple is the largest company by market value, and Microsoft is in third place. Microsoft hasn’t been the largest company since 2002.
Americans are good at technology, and tech stocks typically pay off during a bull market. Since the bear-market bottom, technology stocks in the Standard and Poor’s 500 stock index have soared 264.5%, vs. 259.46% for the index itself, with dividends reinvested.
But financials have soared 308% since the bull market began. One reason, of course, is that they were clobbered so badly in the financial crisis. Many cut or suspended their dividends, either voluntarily or by government intervention. According to the Federal Deposit Insurance Corp., 512 banks have failed since 2008.
The failure rate has slowed dramatically: 18 FDIC-insured banks sang with the Choir Invisible last year. At the same time, financials are increasing their dividends. In the past 12 months, 43 out of 63 financial services stocks raised or initiated dividends. (I excluded real estate investment trusts from the category, because dividends are pretty much all they do). And, for the first time since the financial crisis, financial stocks are once again the largest aggregate dividend payers.
Despite their runup, financial services stocks are still 29% below their October 2007 highs, a reflection of how badly the industry was pummeled. At the moment, the group sells for 14.3 times estimated earnings. That’s lower than the S&P 500, but bank stocks usually sell for less than the market as a whole.
While most of Wall Street will watch Apple and Microsoft (and Yahoo) tomorrow, you might want to keep an eye on the financials as earnings season progresses.