The Big Picture
Last Updated: 14-Aug-26 16:16 ET | Archive
A market worth its weight
Briefing.com Summary:
*The information technology sector has been the S&P 500's undisputed heavyweight, accounting for 37.9% of the index after years of market-leading performance.
*Information technology and communication services are the only sectors carrying more weight today than a decade ago, while the other nine sectors have all lost ground.
*That concentration creates an intriguing rotation opportunity: even a modest reallocation away from information technology could provide a handsome lift for smaller sectors.
There isn't a single publicly traded company that doesn't rely on information technology to run its business. The products and services might be different, but information technology is behind the manufacturing of those products and the efficient delivery of those services.
The technology supply chain has many links, including software, semiconductors, PCs, servers, fiber optics, hard drives, routers, and the list goes on. We now need to include large language models and AI as key tools for businesses embracing their promise as productivity drivers.
The so-called "AI trade" has been a major catalyst behind the stock market's breakout to all-time highs. Ironically, it has also been a major source of consternation, fueling talk that the stock market is in a "bubble," the implication being that we are in a situation akin to the dot-com days that started with a bang and ended with a 401(k)-crushing bust.
Anything is possible, but the reality today is that investors seem to have their minds and their allocations heavily weighted toward the information technology sector. And you know what? That has been a very profitable orientation. The S&P 500 information technology sector is up 23.9% year-to-date, up 31.3% over the last 12 months, up 158% over the last five years, and up 800% over the last 10 years.
It has been the place to be, but keeping up with the in-crowd isn't always that easy, even if it is a minimum requirement for some fund managers. For some investors, overweighting the information technology sector is a calling. For other investors, its enormous weighting raises another question: if money starts coming out of information technology, where might it go?
Step on the Scale
The S&P 500 is comprised of 11 economic sectors: information technology, financials, communication services, consumer discretionary, health care, industrials, consumer staples, energy, utilities, real estate, and materials.
These sectors are not all created alike. Their composition varies widely.
The information technology sector has 74 components in it and accounts for 37.9% of the S&P 500's market capitalization. The industrials sector has 81 components in it but accounts for just 8.7% of the S&P 500's market value. The communication services sector has only 22 components, but it accounts for 9.6% of the S&P 500's market value.
The information technology sector is home to Apple (AAPL), NVIDIA (NVDA), Microsoft (MSFT), and Micron (MU), to name just a few of its luminaries, so it is easy to see where it gets its good looks and weighty proportions.
It has gained a significant amount of weight since the end of March, too, far outpacing every other sector. One could argue that it has eaten the lunch of other sectors whose relative weightings have dropped over the same time.
Source: FactSet
That isn't a new phenomenon. The information technology sector has been dominating the S&P 500 dinner table for some time. ChatGPT was launched in November 2022, and the sector's weighting has only gotten heavier. The communication services sector, which was reconstituted in 2018 and brought Alphabet (GOOG/GOOGL) and Meta Platforms (META) over from the information technology sector, is the only other sector carrying more weight today than it did a decade ago. The other nine sectors are carrying less.
Source: FactSet
Briefing.com Analyst Insight
The information technology sector has been eating well for a long time, and there is no reason it can't continue to do so. The secular drivers behind technology spending, cloud computing, semiconductors, and artificial intelligence remain powerful, and the sector is populated by some of the most profitable and innovative companies in the world.
Still, at 37.9% of the S&P 500, a lot of good news—and a lot of investor capital—is already concentrated in one place.
That concentration is worth considering because the stock market is a relative game. Investors reducing their exposure to one area don't necessarily have to reduce their exposure to stocks altogether. They can simply reallocate to another area. There are plenty of potential destinations today.
Financials account for 12.2% of the S&P 500. Health care, industrials, consumer staples, energy, utilities, real estate, and materials collectively represent a sizable portion of the index, yet each has lost weighting relative to where it stood 10 years ago. In other words, information technology's expanding seat at the table has come partly at the expense of most everyone else's elbow room.
That could become an important consideration if enthusiasm for the AI trade cools, earnings expectations for the technology leaders become harder to clear, or investors simply decide that the risk-reward proposition favors taking some profits in their biggest winners.
A fallout in information technology, therefore, doesn't have to mean a fallout for the entire stock market. It could instead become the catalyst for a major rotation.
Even a modest reallocation from a sector representing nearly 38% of the S&P 500 could amount to an enormous flow of capital relative to the market values of the smaller sectors. That wouldn't guarantee that those sectors outperform, of course. Fundamentals, earnings growth, interest rates, and valuations will still matter. Yet the S&P 500's current concentration suggests that it wouldn't take a wholesale abandonment of technology to provide a handsome lift elsewhere.
Information technology has spent years eating everyone else's lunch. If investors ever decide it is time to change the menu, there are 10 other sectors waiting to be served.
