A Blog by Jonathan Low


Jul 16, 2013

Finance About to Surpass Tech Again As Most Profitable US Industry

You mean finance isn't already the most profitable sector in the universe?

Well, it was, and it is about to be again but in the interim there was that recent unpleasantness that took a while to figure out.

Finance certainly seems like it should be the most profitable. Money makes money and all that. But that spot of bother known as the financial crisis kinda sucked the juice out of the industry for a while. Like five years. Since no one really knew what many of the investments that cratered actually did or, for that matter, who owed what to whom, there was some confusion about what was profit, what was debt and what was pure trouble. As a result, someone had to be appointed to try to make sense of it all. Since various governments were on the hook for trillions or, they were told, the world as we know it would end, they had to justify their infusions of capital by poking around and making suggestions. Sort of like your grandma warning you to wear your galoshes and cover your mouth when you cough.

But then some of those pesky officials actually took their jobs seriously and tried to impose rules. As a result some people lost their jobs (more for me was the sentimental reaction of the finance industry survivors) and much worse, profits were curtailed, affecting compensation.

In the interim, tech slithered to the top of the heap. This was considered an indignity by the bankers because the two industries are linked inextricably. Tech couldnt raise its funds without finance and finance couldnt generate fees as large without tech. But, as the following article explains, all will soon be right with the world. Finance will once again assume their rightful dominant position and its vassals, like those guys who make computers and stuff will be put in their place - until the next financial crisis. JL

John Shinal reports in USA Today:

Since the near-collapse of the U.S. financial sector in 2008, the technology industry consistently has been the most-profitable part of this country's economy.
In 2012, tech companies contributed almost a fifth of all profit reported by the corporations in the S&P 500 index, slightly more than the earnings of financial services companies.
Yet if those same large companies report second-quarter results over the next few weeks that are in line with Wall Street expectations, finance will be well on its way to overtaking tech this year to once again become the U.S. industry that earns the most annual profit.
The reasons go beyond the taxpayer-funded bailouts of large banks and insurers in 2008-2009, which helped put those companies back on their feet after losses on mortgage-backed securities decimated their balance sheets.
Today, while U.S. financial services companies do the majority of their business here, tech companies garner a large share of their sales from overseas. And while the U.S economy keeps growing at a slow-but-steady pace, prolonged recessions in Europe and slowing growth elsewhere have turned hardware and software exports — once a strength of the tech industry — into a relative weakness.
"Technology has a lot more exposure to international markets, and the economic picture overseas isn't as strong as it is here right now," says Sheraz Mian, director of research at Zacks Investment Research.
According to Mian's analysis, U.S. financial services companies in the S&P 500 index are expected to report that they earned aggregate profits of $49 billion in the second quarter.
That's almost 20% of the $247 billion in quarterly earnings expected from the S&P 500 companies as a whole.
By comparison, the tech sector is expected to report earnings of $41.5 billion, or 16.7% of the quarterly total.
For all of 2013, the finance sector is expected to post profits of $198.5 billion, or just over 19% of the total, while tech companies are expected to produce $183.1 billion, or just under 18%.
That would be a reversal from 2012, when the technology sector contributed 19% of the total annual earnings of the S&P 500, while financial services produced 18%.
"Finance is reclaiming its dominant earnings position in the index, which had been taken over by tech following the 2008 crash," Mian says.
Second-quarter earnings for the finance sector are expected to climb almost 20% from the same period in 2012, with all of the different industries within the sector — including major banks, regional banks, insurers and brokerages — set to report higher profit.
Leading the way will be investment banks and brokerage houses, whose earnings are seen surging 40%.
The industry has once again become such a driver of U.S. earnings growth that, without it, corporate profits would be seen declining 3.2% in the second quarter compared with a year ago.
Even including financial services, profit growth of the S&P 500 companies is expected to come in at a tepid 0.4%.
But even that's better than the outlook for tech-sector profits, which are expected to drop 8.3% in the second quarter, according to Zacks, following a drop of 4.2% in the first quarter.
Technology also has been hurt by a sharp drop in PC sales, which have depressed earnings at giants such as Dell and Hewlett-Packard, as well as at their component suppliers, including chip giant Intel.
Despite all the gloom — profits in the tech sector are expected to fall 6.3% in the first half — Wall Street analysts still remain optimistic regarding its prospects this year.
Tech earnings for the second half of 2013 are expected to rise 4.2%, helped by back-to-school sales and holiday sales of smartphones, computer tablets and software, all of which are areas of relative strength within the sector.
That bullishness has helped propel tech stocks higher this year, with the Nasdaq rising 19% in 2013, in line with the rise in the S&P 500 index.
In fact, the Nasdaq is now trading at its highest level since late 2000, before the second wave of the dot-com crash brought it back to earth.
It's now roughly doubled since bottoming out in early 2009, in the wake of the financial meltdown.
With that much optimism already baked into tech stocks, all eyes will be on the third-quarter forecasts given out by tech companies over the next few weeks.
If the second-half earnings estimates of Wall Street analysts turn out to be overly optimistic, savvy investors may want to move some of their money out of tech and into financial services, where the prospects for earnings growth appear stronger.


Post a Comment