Finance set to surpass tech as most-profitable U.S. industry

John Shinal | Special for USA TODAY

SAN FRANCISCO — 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.

John Shinal has covered tech and financial markets for 15 years at Bloomberg BusinessWeek, San Francisco Chronicle, Dow Jones MarketWatch, Wall Street Journal Digital Network and others. Follow him on Twitter: @johnshinal.