Technology stocks’ outperformance in the S&P 500 is unprecedented, and it’s hard to argue that they will dominate in the future.
At Tuesday's close, the S&P 500 information technology sector, plus Amazon (AMZN.O), Tesla (TSLA.O), Alphabet (GOOGL.O) and Meta Platforms (META.O), accounted for a record 47.33% of the S&P 500. The weighting of these tech giants has steadily climbed from 44.57% a month ago, according to Dow Jones Market Data.
The index's weightings are based on a company's market value, so its total weighting rises as investors pour money into stocks they believe will benefit from the rise of artificial intelligence.Technology companies and others in the economy will invest more than $1 trillion in AI over the next few years to automate jobs, increase productivity and reallocate labor to other tasks, creating new opportunities, according to Goldman Sachs GS.N.
The market’s 18% gain so far in 2024 is almost entirely due to confidence in artificial intelligence and expectations that the Federal Reserve will lower interest rates after winning the battle against inflation.
Of the 130 trading days so far in 2024, only 14 have accounted for all of the S&P 500's year-to-date gains, Nicholas Colas, co-founder of DataTrek Research, said in a note Wednesday. Each of those days provided investors with direct proof that generative AI is the next big thing, or provided evidence that the Federal Reserve will cut rates, or both.
“There are likely to be additional ‘year-defining days’ in the coming months, and we expect them to have the same catalysts as those in the first half of the year,” Colas wrote.
Mid-year market outlook reports, including one from Citigroup Inc C.N, have also highlighted AI as a factor sustaining the bull run in the S&P 500. Barclays BCS.N said in a mid-year update on Wednesday that big technology companies are likely to remain the main driver of profit growth in the second quarter.
Investors need an edge in tech stocks, and the sector's huge weighting in the S&P 500 means that investors who just want to track the overall market's gains are heavily locked in. This means that so far this year, at least for those looking to make money in the short to medium term, it has been impossible to bet against the sector.
Without the information technology sector stocks, plus Amazon, Tesla, Alphabet and Meta, the S&P 500 would lose $5.6 trillion in market value by 2024.
Still, we should be at least skeptical about the dominance of tech stocks in the S&P 500 and the future returns of artificial intelligence. Despite widespread optimism — Goldman Sachs released a 32-page report about two weeks ago saying AI has more room to grow — the market’s high concentration in tech stocks has raised concerns about investors’ exposure and vulnerability to the sector.
AI experiments depend on the financial strength of the companies behind them. The rush to integrate AI into services and products is at least partly financed by strong corporate profits, so a recession would hurt earnings, slowing the pace of investment. And it’s still possible that investors are overestimating the future impact of AI on a wide range of industries.
The potential for a reversal in investor enthusiasm underscores the need for investors to diversify their portfolios and balance exposure across asset classes, especially as the S&P 500 becomes more concentrated. True, betting on a tech decline has been a losing move, but it’s worth considering the risk of a rotation like the one in 2022, when tech fell out of favor and previously overlooked sectors like energy suddenly found favor.
Article forwarded from: Jinshi Data