Why 26 Singapore blue chips flatlined whilst banks powered the STI

DBS warns bank valuations have stretched too far as dividend yields compress ahead of August ex-dates.

Singapore's equity market has leaned heavily on a handful of lenders in 2026, and DBS sees room to spread investor bets towards names that have lagged.

The three local banks and the Singapore Exchange (SGX) contributed 95.2% of the Straits Times Index's (STI) 1,025-point rally year-to-date, whilst the remaining 26 component stocks added just 50 index points between them, according to DBS.

The house said the concentration had become more pronounced since the US-Iran conflict began on 28 February, with the 26 stocks outside the banks and SGX collectively subtracting 184 index points over that period.

This masked weakness across the broader market and stood in contrast to last year's more balanced rally, when four financial stocks contributed 62.3% of the index's 850-point gain, and the remaining 26 components contributed the rest.

The house cautioned that banks could face a rocky month ahead. It said their price-to-book valuations had climbed well above two standard deviations, whilst dividend yields had compressed, with OCBC's forecast yield below 3.5% and UOB's below 4.2%.

DBS said the dividend appeal of both would temporarily take a back seat following their ex-dividend dates in August, as the next payouts are not due until April 2027. With the STI trading above 17 times forward earnings, the house said it expected banks to enter a correction or consolidation phase during a seasonally weak third quarter.

Rather than retreating, DBS advised rotating into large caps with earnings momentum, stable interest rate beneficiaries and value-unlocking catalysts. It said it favoured index stocks underpinned by multi-year orderbooks.

The house said Singapore real estate investment trusts (S-REITs) should benefit from a more stable interest rate outlook.

DBS said small and mid-cap stocks (SMCs) remained in play a year into the Equity Development Programme (EQDP), under which $3.95b has been allocated and a further $2.55b is pending following a $1.5b top-up in Budget 2026. It said the expectation for a broadening rally, further EQDP deployment, better entry points after the year-to-date correction and lingering tech volatility should renew interest in SMCs, particularly constituents of the FTSE ST All Share Index against which many EQDP funds are benchmarked.

The house said it remained constructive on five themes: value unlocking; AI and technology; high-growth REITs; beneficiaries of higher trading turnover and wealth growth; and stocks with stronger outlooks for the second half of 2026 and 2027.

“The MAS support measures introduced over the past one year are intended to revive the broader Singapore equity market, not just the financial stocks,” DBS said.