Tech tops financials in S&P; energy on the rise

[May 24, 2008]  NEW YORK (AP) -- For the first time since the bubble burst earlier this decade, information technology stocks have overtaken financials as the largest sector by market value in the Standard & Poor's 500 index. But that alignment might not last for long - soaring oil prices have helped lift the energy sector to a close third.

For the last 10 years, tech and financials have gone back and forth as the leading sector in the index. Tech grabbed about 32 percent of the S&P by early 2000, but quickly gave up that lead as the sector lost its luster amid the dot-com crash.

A little over a year later, financial stocks had become Wall Street's favorites, and kept the top spot in the S&P until this past Tuesday. While they never reached the heights tech did during the boom years, financials did account for more than 22 percent of the S&P by late 2006.

Now, both sectors hover just above 16 percent, with tech ahead marginally. And energy companies, led by oil producers like Exxon Mobil Corp. and Chevron Corp., could be in position to soon take the lead.

Much of the switch can be attributed to the devastation of the financial sector in the last six months, as the credit crisis and housing recession took their toll. Melissa Roberts, senior vice president of quantitative research at Keefe, Bruyette & Woods, noted that 16 of the 92 financial stocks in the S&P have fallen 30 percent or more since the index peaked in October, with diversified financial companies like Citigroup Inc. and JPMorgan & Co. among the hardest hit.

Some tech stalwarts like IBM Corp. have gained in recent months. But Howard Silverblatt, S&P's senior index analyst, noted that while IT performed slightly better than the S&P overall, most of the sector didn't "earn" its way to the top.

"It's not that tech did so much better, it's that the financials did so bad," he said. "The financials gave it to them."

That might reflect some lingering wounds from tech's downfall.

"There's still a specter of the bubble that is hovering over tech, even though the sector is much different from it was eight years ago, let alone four years ago," said Brian Belski, an analyst with Merrill Lynch. "People learned their lesson in tech because they got burned, and it's taken them years to want to invest in them again."

He suggests tech could gain more strength and more firmly establish itself as the leading sector again.

"We haven't seen the big shift in leadership, but fundamentally we think it can very much happen," Belski said. "Not because tech looks attractive on a valuation basis, but fundamentally it is a much different sector than it was four years ago."

For instance, in 1999, players like Cisco Systems Inc. or Hewlett-Packard Co. would see their shares routinely rise or dive by 10 percent. These companies now trade much more conservatively, while the financials are the ones with the big swings.

Still, the dark horse may turn out to be energy, which has leaped in the past year as oil prices have doubled. "You see a lot of what's leaving the financials going into energy," Roberts said. "That's the No. 1 performer."

And the sector is gaining momentum. Silverblatt said that when the S&P hit its all-time high in October, energy made up about 11.6 percent of the index. It reached 14.9 percent on Thursday, the highest percentage the sector has occupied since the index's current configuration was developed in 1989.

"That's an enormous gain in a short period of time," he said. "Their stocks during that time period were up 13.2 percent."

One factor that's hard to gauge is whether politics will enter the picture. Big oil executives were called to testify this past week before both houses of Congress, and oil's march past $135 a gallon may prompt politicians to try to apply new taxes that could limit energy company profits, or take other measures which could potentially hurt energy stocks.

Also, energy's rise has hit other sectors of the S&P, like consumer discretionary stocks, as companies have tried to pass on higher costs to customers, Silverblatt noted. If oil reaches the $150 a barrel some predict, those additional costs will spread throughout the economy, he said, and could hurt both corporate spending for things like IT and consumer spending for both staples and discretionary items.

"The race right now between milk and gas - which hits $4 a gallon first - is neck and neck," he said.

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Associated Press Business Writer Joe Bel Bruno in New York contributed to this report.

[Associated Press; By EILEEN AJ CONNELLY]

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