17.06.2024 Issuer Call Redemption Notice

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Sandeep Rao


Banks Down, Big Tech Up? Size Plays a Role

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It should be clear by now that the U.S. is headed towards a recession in all but the “technical” sense, i.e. unemployment figures aren’t nearly high enough to call the current period recessionary. However, data coming out of the banking sector have a couple of indicators.

Global macroeconomic consultancy TS Lombard published that, as of January this year, small banks in the U.S. were critically low on deposits and had starkly low liquid reserves.

Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

Small banks were heavily dependent on loans contributing to their balance sheet at a time when lending activity was heavily distressed. In the midst of the collapse of Silicon Valley Bank and Signature Bank, the entire financial sector was under a lot of pressure. Small banks saw a massive drop in weekly deposits through the course of March, which hadn’t fully recovered by the end of the month.

However, closer inspection reveals that small banks’ reserves-to-assets ratios continue to look fraught while that of big banks is on an uptrend.

Recent earnings releases confirm this trend. Broadly, while the banking sector’s prospects were imputed with bearish expectations by analysts, big banks did marginally better while smaller banks generally didn’t. Now, classical market empiricism suggests that while the consumer discretionary sector is supposed to be attractive in a recessionary period, financials tend to hold firm. Classical market empirics no longer hold true.

Big Tech: Size Matters?

Over the past two weeks, market flows have been imparting momentum in some interesting directions. For example, in the week prior to last (i.e. Week 15), tech companies drove a substantial part of the momentum in the S&P 500:

Also making a presence felt were a small number of leisure stocks – casinos, resorts, et al – along with the sundry pharma stock. In Week 16, the same pattern continued:

The significance of the Top 25 on the directionality of the S&P 500 can also be seen in the growing correlation between their combined momentum and the index’s weekly change.

The preponderance of Big Tech in the Top 25 – and its relative impact on the economic bellwether – has been increasing over the past years. “Technology” had gone from comprising a little under 15% of the S&P 500 to nearly a third.

Meanwhile, the banking system has gone from being over a quarter of the top-of-the line economy to a single-digit percentage contribution.

Given that the present economic outlook sounds all warning bells on lowering consumption being expected, the rise of Big Tech stock trajectories is a cause-and-effect phenomenon: more investors are shifting to the view that Big Tech will remain ubiquitous and central to economic activity, while companies (even tech) on the lower end of the size spectrum being implied to have lower survivability.

Key Takeaways

Bearing in mind the concentration of overall trajectory into the top of the line of the S&P 500, it’s also germane to note that the number of companies hitting new 52-week highs is at 5-year lows:

This lends strength to the notion that flows into large-cap stocks are informing market trajectories more than the rest of the market itself. Also, given that government debt exposure remains a niche interest, this flow is also driven by limited access to viable alternatives. In other words, a significant portion of these flows follow a form of self-preservation which becomes a self-fulfilling prophecy: as their valuations fall, smaller companies will find it increasingly harder to secure financing and challenge the status quo. One means of growth would be to collaborate/enjoin with the top-of-the-line which further biases survivability.

All in all, size matters and it’s important to be wary of fuzzy growth narratives. Markets continuing to be in churn provide an ideal opportunity to make tactical trades, which Exchange-Traded Products (ETPs) are well-equipped to provide at low costs and with no margin requirements. Leverage Shares offers a wide variety of products that give the sophisticated investor enhanced exposure on both the upside and the downside. Click here to explore and learn more.

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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