The Changing S&P 500

The market rally the last few years has been uneven, and that’s led to technology stocks dominating the S&P 500.

S&P doesn’t rebalance the S&P 500 index on a regular basis. It generally lets the market do that, as the weight of different stocks and especially sectors changes over time.

Sometimes the changes can be significant. Technology stocks have had much higher returns than other sectors the last few years. That’s led technology to be the dominant sector in the S&P 500, amounting to 25.05% of the index recently.

That’s a milestone.

Back in 1990, technology was less than 10% of the index. In the 1990s, the sector’s weighting climbed fairly steadily until it peaked at 34.81% in March 2000.

Technology stocks then crashed. The sector’s weighting rapidly declined until it bottomed below 15% in the early 2000s. It has held steadily between 15% and 20% most of the time since then.

But the weighting began climbing in 2013. Tech’s weighting accelerated after the early 2016 correction. It recently climbed above 25% for the first time since the last four months of the tech stock bubble.

Of course, that means anyone who owns an S&P 500 index fund is placing a heavy bet on technology. The index is much less diversified than it usually is.

One difference between 2000 and now is that the major technology companies driving the index are mature and have histories of real cash flow and profits. There’s a big difference between Apple and Google today and companies such as pets.com in 2000.

Another difference is valuations. The mania for technology stocks in 2000 was so severe that the price-earnings ratio for the technology sector was around 80 (based on trailing earnings). Today, it is just under 24.

Even better, technology’s valuation today is at about a 10% premium to the overall S&P 500. Back in 2000, technology’s valuation was about three times that of the index. Even the solid tech companies of 2000 that still are major companies today (for example, Microsoft and Oracle) trade well below their valuations of early 2000.

So, while the recent milestone is worth noting, it’s not a clear signal to sell technology stocks, as it was the last time technology was such a large part of the S&P 500. Investors need to be aware, however, that the major technology companies are driving the overall index. Investing in the index is making a big bet on technology.

The Data

The non-manufacturing sector of the economy continues to do well, according to business surveys.

The PMI Services Index rose to 55.9 from 53.3. Business optimism is at a 13-year high for this survey, and some components of the survey, such as higher order backlogs, indicate capacity is stretched.

The ISM Non-Manufacturing Index was down slightly to 59.5 from 59.9. But it was above expectations. This survey also showed signs that businesses are stretched to capacity.

Factory Orders confirmed that the manufacturing sector isn’t doing as well as the various surveys indicate, and that the sector slowed in January. The headline orders were down 1.4% for the month. After excluding the volatile transportation sector, orders were down 0.3%. This follows strong 0.8% and 0.4% gains the previous two months. Core capital goods, an important sign of business investment, were down 0.1%.

The employment data looks strong ahead of tomorrow’s Employment Situation reports. The ADP Employment Report showed 235,000 new private sector jobs created in the month. Also, last month’s report was revised higher to 244,000 from 234,000.

New unemployment claims increased by 21,000. But, since last week’s new claims were a 49-year low, this week’s number still is very low.

Consumers stopped expanding their use of credit in January. Overall, consumer credit outstanding increased substantially less than previous months. Most of the new credit was vehicle and student loans, with credit card use being very low for the month.

Consumer Sentiment, as measured by the University of Michigan, rose again in February to 99.7 from 95.7 in January.

The Markets

The S&P 500 rose 0.42% for the week ended with Wednesday’s close. The Dow Jones Industrial Average lost 0.84%. The Russell 2000 jumped 4.25%. The All-Country World Index rose 0.44%. Emerging market equities gained 1.42%.

Long-term treasuries fell 0.42% for the week. Investment-grade bonds declined 0.40%. Treasury Inflation-Protected Securities (TIPS) returned 0.13%. High-yield bonds lost 0.21%.

The dollar tumbled 1.10%.

Energy-based commodities lost 0.06% for the week. Broader-based commodities returned 0.12%. Gold rose 0.39%.

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