Why this sector is performing three times better tech stocks

Key points

• Financial stocks have outperformed tech stocks over the past 12 months and YTD.

• Financials have beaten all sectors except for one over those time periods.

• Can the outperformance continue?

It has beaten the tech sector over the past 12 months and YTD.

Technology stocks have been the dominant performers over the long term, but in the past year or so, there has been a shift.

As technology stocks have surged in recent years, fueled by advancements in artificial intelligence, their valuations have become extremely high. In many cases, the prices have shot so high, they are unsustainable, relative to earnings.

That has caused some stocks in the technology sector to correct or drop by at least 10%.

At the same time, the shift in the market has been good for other stocks, particularly those in sectors that had been beaten down and devalued, like financials.

Financials have endured some difficult years. Banks struggled in 2023 during the banking deposit crisis, brought on by high interest rates. Investment banks were challenged by high inflation and two of the worst years ever for mergers and acquisitions.

But over the past year or so, investors have been seeking out values, and have found them in the financial sector, as the economy has improved, and inflation rates have dropped. In fact, financials have outperformed technology stocks in recent months.

Financials are the second best performing sector

Over the past 12 months, large-cap financial stocks have returned 33.7% on average, according to Fidelity Investments data. That is better than any other sector, except communication services, which has a one-year return of 37.2% as of February 18. The information technology sector has an average return of 28.1% over that period.

Within financials, consumer finance stocks have performed the best, up 54.8%, while banks are right behind with an average return of 51.3%. Those returns are better than any industry within IT, including semiconductors, which have an average return of 51.2% over the past 12 months.

The performance gap becomes even wider when looking at returns year-to-date. Financial stocks within the S&P 500 are up 7.0% YTD, second only to communication services at 8.8%. IT stocks this year have returned just 1.6%, with semiconductors up just 3.4%. IT is the second worst performing sector YTD, ahead of only consumer discretionary stocks, which have returned 0.9% YTD. The S&P 500 overall is up 4.0% YTD.

As mentioned, a lot of it has to do with investors looking for good values in an improving economic environment. And with financials still mostly undervalued, and tech stocks still mostly overvalued, the outperformance of financials could continue in the near-term.