Idea of the day Apple vs Goldman Sachs

What: Friday’s unexpected sell off in US tech stocks surprised financial markets and has left  investors with a couple of key questions. Firstly, does the sell-off in technology shares justify a broad sell off in other risky assets? Secondly, is the sell off localised and thus offers a chance for other sectors of the US market to play catch up with tech?

We believe that the latter could be correct, as nothing fundamental appeared to spark this sell off. Instead, the sell off appeared to be triggered by a report from Goldman Sachs (ironic, we know) that pointed out the enormous boost to the market capitalisation of tech stocks this year, some $600bn, which may be stretched.

Interestingly, while tech stocks fell, we saw banking and financial stocks do well. This suggests to us that we could see some rotation out of the overvalued tech sector and into some of the least loved stocks of recent months like financials. US financial stocks could also benefit from political developments. The House of Representatives have sent a bill to the Senate to reduce financial market regulation. If this passes then we could see finance stocks upward momentum start to build.

How: The chart below shows Apple and Goldman Sachs. This chart has been normalised to show how they move together. As you can see, Goldman Sachs (as benchmark for US banking stocks) has underperformed Apple since mid-April, however, it rallied on Friday as Apple fell sharply, which could be a sign that US financials are poised to outperform tech once again.

Thus, if we continue to see tech stocks come under pressure, and as long as overall risk sentiment holds up, then we may see some sectorial rotation from investors that benefits financials rather than the tech sector.

Figure 1: 

Source: City Index and Bloomberg