The Tech Takeover of the S&P 500 Continues at a Rapid Rate
The technology sector has taken over the S&P 500 in a big way, with a record-breaking 30% of the benchmark index now being comprised of tech-related names. This means that tech now accounts for more than the combined weight of the next two largest components of the index, healthcare and financials. In reality, the true tech weighting is likely over 40% and growing, as tech companies have outperformed the overall index this year.
Tech Driving Growth in the S&P 500
Led by the broader technology sector, the S&P 500 has posted a 5% gain so far this year, following its impressive 26% total return in 2023. This growth has outpaced the smaller-cap indexes by a significant margin. The S&P MidCap 400 has seen a modest 2% increase this year, while the Russell 2000 index has only gained 0.5%. Interestingly, much of the mid-cap index's advance and all of the gains in the Russell have come from just one technology stock: Super Micro Computer.
Understated Influence of Tech Companies
The technology weighting in the S&P 500 understates the true influence of tech companies due to the classification decisions made by S&P Dow Jones Indices, the organization overseeing the index. For example, Alphabet and Meta Platforms are classified as communication-services companies, alongside AT&T. However, Alphabet alone accounts for about 3.8% of the S&P 500, while Meta has a weighting of around 2.5%. Amazon.com, the largest company in the consumer discretionary sector, carries a weight of 3.7% in the index, and Tesla, another consumer discretionary stock, makes up 1.2%.
The Rising Influence of Tech-Driven Companies
Additionally, there are other tech-driven companies that are not even classified as tech companies. Uber Technologies, for example, has become the largest industrial company, surpassing Caterpillar. When you combine the technology sector with these tech-related companies, the total "tech" weighting exceeds 40%.
The Implications for Active Managers
The dominance of the tech sector in the S&P 500 has made it exceedingly difficult for active managers to outperform the index. This is particularly true with the rise of the "Magnificent Seven" big tech stocks. Todd Ahlsten, the Chief Investment Officer at Parnassus Investments, called the S&P 500 an "awesome asset class" and highlighted the innovation in various tech fields such as cloud computing, semiconductors, life sciences, industrial automation, transportation, and electrification.
While the significant tech weighting in the S&P 500 does leave the index vulnerable to a potential tech pullback, so far this year, the tech sector continues to set the pace and drive overall market growth.
Analyst comment
Positive news: The technology sector’s dominance in the S&P 500 continues to grow, accounting for a record 30% of the index and outperforming other sectors. Led by the tech sector, the S&P 500 has seen a 5% increase this year. The index’s strong performance makes it difficult for active managers to beat. However, the high tech weighting also makes the index vulnerable to a tech pullback.
Market analysis: The market is expected to continue to favor the technology sector, with the S&P 500 benefiting from the strong performance of tech companies. However, the high tech weighting also poses a risk as any potential tech pullback could impact the overall market.
