Salient to Investors:

Banks, brokers and insurance companies make up 16.8 percent of the S&P 500, almost double the level from 2009 and versus tech companies at 17.6 percent. Banks were the largest US industry during the bull market that began in 2002, and financial firms grew to 18.8 percent of the index in the late 1990s,

Bulls contend the change signals banks will lead the economy even after the Fed begins to taper. Bears say S&P 500 profits would be down this quarter if not for banks, and the last time financials were the biggest industry, in 2008, the consequences were disastrous.

Kevin Caron at Stifel Nicolaus said the reasonably good performance of the banks provides confidence in the underlying economy – without the financials working, all the rest would not be working.

Analysts expect S&P 500 earnings to climb 3.3 percent, led by a 27 percent increase in bank profits: ex-financials industry, S&P 500 earnings would contract 1.2 percent. Banks are beating analyst estimates by 8.9 percent. Economists expect GDP to increase 1.8 percent in 2013, and 2.7 percent in 2014, and versus the average of 2.4 percent since 1990. Computer makers and software designers have reported earnings 0.4 percent below analysts’ estimates on average.

Jeff Saut at Raymond James said we are rebounding as the banking system is getting healthier and eventually that flows into the economy in making it easier to get a loan.

JPMorgan, Goldman Sachs, Bank of America, Citigroup and Morgan Stanley controlled 95 percent of cash and derivatives trading for US bank holding companies at December 31, 2012.

Stanley Nabi at Silvercrest Asset Mgmt said the regulators are going to look over the shoulders of the banks and make sure that they are not raising their risk profiles.

Matt McCormick at Bahl & Gaynor said expectations are ahead of themselves, so prefers tech over banks in 2013.

Dan Veru at Palisade Capital Mgmt said banks will continue to tread higher as investors are starting to say that they need to invest in the sector.

Todd Lowenstein at HighMark Capital Mgmt said financials were hit hardest in the crisis we are still in the early innings of recovery.

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