Tech dominates S&P 500 like no time since dot-com bust

Bloomberg

Don’t look now, but technology companies are exerting more control over the US stock market than any time since the internet bubble.
Fueled by three-year rallies in which Microsoft Corp. and Alphabet Inc. doubled, Amazon.com Inc. tripled and Facebook Inc. surged fivefold, computer and software stocks have increased to almost 21 percent of the S&P 500 Index’s value, near a 15-year high. The distance between tech and the next-biggest group, banks, is close to the widest ever.
While the divergence rings warning bells for anyone who lived through the crash of 2000, tech’s ascent has its virtues and is in some ways a sign of the market’s health. For one, it reflects the diminishing influence of banks, which held a much larger share of the S&P 500 in the years before the financial crisis. It’s also evidence of rationality: tech is one of the only industries where earnings continue to expand.
“The underlying economy is moving more toward technology, so to have it make up a bigger part of the market is probably not a disconnect,” said Brent Schutte, Milwaukee-based chief investment strategist of Northwestern Mutual Life Insurance Co.’s wealth-management unit, which oversees $89 billion. “This is not me saying that technology is cheap,” he said. “It’s just taking away that argument that this is a bubble waiting to happen.”

MARKET ANXIETY
Swelling in the market’s largest group comes amid warnings from bears such as billionaire investor George Soros that stocks are at risk for a repeat of the 2008 crisis. While widening valuations and demand for safety trades such as utilities and low-volatility shares have stirred anxiety, the resurgence in tech shows one cornerstone of the seven-year bull market is behaving as it normally does.
The Nasdaq Composite Index and S&P 500 Information Technology Index have both rallied 23 percent since markets bottomed in February. Semiconductor companies like Nvidia Corp., Applied Materials Inc. and Micron Technology Inc. have led the S&P tech gauge, while only one of its 68 members, First Solar Inc., is down over the stretch. The Nasdaq closed at an all-time high on Aug. 15, and has climbed for nine consecutive weeks, the longest since 2009.
Tech companies are extending leadership at the fastest rate in four years as their representation in the S&P 500 has increased by more than 1 percentage point to 20.9 percent this quarter, about 5 percentage points higher than financial shares. From Apple Inc. to Microsoft, mega techs now occupy half of the top 10 spots in ranks of the most valuable American companies, matching the number at the peak of internet mania.

PROFIT GROWTH
Unlike the dot-com era, when investors snapped up web companies with promise but little profit, today’s gains are built on earnings, driven by demand for products such as Apple’s iPhone and Google’s web ads. Their strength was on display during the earnings season, when companies delivered the biggest beat among industries. While third-quarter growth estimates just turned negative for the S&P 500, the group is expected to expand profit by 2.8 percent.
“The phenomenon is as much of a function of tech being a strong growing sector in terms of earnings as it is financials fading the scene,” said Rich Weiss, the Los Angeles-based senior portfolio manager at American Century Investments, which oversees about $154 billion. “It’s healthy growth. I don’t believe we need to worry about a tech bubble here or in the near future.”

LONGER REIGN
Computer and software makers have been the biggest industry in the S&P 500 for the duration of the bull market that began in March 2009, with their influence widening at the end of 2015 and again now. That’s a far longer reign than the 3 1/2-year stretch that began at the end of 1998, which saw their share of the index reaching almost 35 percent. This time around, the weighting has generally held below 21 percent.
“Does the fact alone that the largest sector in the index eclipses a weighting threshold make the market vulnerable? At a high level, the answer is no, but with a caveat,” said David Kahn, managing director at Convergent Wealth Advisors in Los Angeles, where the firm oversees about $4.5 billion.