Unless you have been off the grid, you know that AI related, and more broadly, tech heavy companies have been dominating the stock market. They are also the subject of heavy media coverage and cocktail chatter, and friends in the brokerage industry relate stories to me of otherwise conservative investors engaging in speculative bets and frenzied trading. Has a single sector ever enjoyed this level of prominence, and can we draw any conclusions regarding tech’s future?
Let’s start with the numbers which can vary a bit depending on which companies you characterize as tech and tech related. In any case, core technology companies represent about 40% of the S&P 500 index, and the addition of adjacent companies such as Amazon, Tesla, Meta, and Alphabet bring the total to between 50% and 60% as shown below.
This level of concentration is extreme but there have been three other instances of disproportionate focus on a single sector. First, the Energy Sector reached 30% of the index in the late 1970’s and early 1980’s, a period characterized by dramatic increases in the price of oil and substantial profits for the oil industry. Next, driven by the development of the internet, the Tech Bubble of the late 1990’s saw the S&P Tech weighting reach about 33%. Finally, the weighting in Financials peaked at 23% in 2006 stimulated by the housing bubble and a broad increase in the use of leverage in the economy. Interestingly, all three were popularized by a dominant, simple to understand narrative:
- Energy- “resource scarcity”
- Tech- “new economy”
- Financials- “permanent credit expansion”
What happened next? Energy stocks declined 40% over the two years following the peak. An investment in that sector in 1980 would have lagged the S&P 500 return by roughly 3% per annum through this year, and the energy weight in the index is now just 3.5%. The Tech laden NASDAQ Index declined 78% from the peak in 2000, and it took fifteen years to recover. Finally, financial stocks fell 80% from 2007 to 2009, and they currently represent 12% of the index, roughly half of the peak exposure.
So, there is a consistent pattern, but this does not mean that a tech crash is necessarily imminent. AI will fundamentally change the world, and tech companies are enjoying extraordinary growth. However, along with many other signs of speculative fever, the current weight should remind us to keep our wits about us, diversify, and be careful about the use of leverage.