Big Tech’s added bulk in S&P 500 in 2023 outweighs index’s energy sector, DataTrek says

These “seven stocks are just over a quarter of the S&P after starting the year as one-fifth of the index,” Nicholas Colas, co-founder of DataTrek, wrote in the note. “One might have convincingly argued that even 20 percent was too high a weighting, but that has not stopped this cohort from gobbling up even more S&P 500 ‘market share’.”

Big Tech has “gained 7.4 points of S&P 500 weighting” in 2023, exceeding the weighting of the index’s entire large-cap energy sector, according to the note. The energy sector weighs in at 4.2% of the S&P 500.

Meanwhile, the amount of Big Tech’s added weight this year is also about triple the 2.5% the materials sector represents in the index, said Colas.

Shares of Big Tech companies have skyrocketed this year against “an otherwise standstill U.S. equity market,” driving the S&P 500’s gains, according to the note. The index, which is a gauge of large-cap stocks in the U.S., has climbed 11.6% this year through Tuesday. 

The S&P 500
SPX,
+0.11%
closed slightly higher Tuesday, remaining on the cusp of breaking out of its bear market as the index is nearly 20% above its closing low last year in October. 

Read: Why the broader U.S. stock market has ‘a lot riding’ on Big Tech earnings

“There’s nothing inherently wrong with a market that chooses to only reward some combination of cost cutting and new technology, but it is far from either the norm or the ideal setup,” said Colas. 

While the rest of the S&P 500 may be starting to benefit from “stabilizing” expectations for company earnings against the backdrop of still “reasonably strong” economic growth, as well as from “incremental clarity” over the past few weeks on the debt ceiling and the Federal Reserve’s upcoming policy meetings this month and July, “we will want to see more proof before being convinced of its permanence.”

Seven of the S&P 500’s 11 sectors rose Tuesday, with financials posting the strongest performance with a sharp gain of 1.3%, according to FactSet data.

While Big Tech is trading at an average 44.2x the group’s forward 12-month earnings, the S&P 500’s much smaller energy sector trades for 10x forward earnings while the materials sector is valued at 15.8x, according to DataTrek. 

Big Tech valuations are “high,” said Colas, with Apple, Microsoft and Alphabet and Meta being “somewhat high” while Amazon, Nvidia and Tesla are “extremely high.”