Tech Sector Concentration: The Good, The Bad, and The Ugly

Go where you’re lookin’ and look where you’re goin.’ -Clint Eastwood

The S&P 500’s 2024 rally had a clear storyline: Big Tech dominance. Over 50% of last year’s gains came from just seven stocks – the so-called Magnificent Seven (Meta, Microsoft, Alphabet, Amazon, Apple, Nvidia, and Tesla). Nvidia alone skyrocketed 171%, accounting for more than a fifth of the index’s total return. Strip out these giants, and the broader market’s performance suddenly looks far less impressive.

But is this another dot-com bubble waiting to burst? Unlikely. While tech now makes up nearly 32% of the S&P 500, valuations aren’t just riding on hype. These companies are generating strong earnings and leading the charge in AI innovation. The Magnificent Seven are expected to invest over $300 billion in AI infrastructure this year alone – a number that dwarfs the speculative excesses of the late ‘90s. This isn’t a story of irrational exuberance but one of tangible technological transformation.

That said, tech’s influence introduces risks. Nvidia recently spiraled down 18% after the launch of DeepSeek AI, wiping out a record $600 billion in a single day, raising concerns about AI-driven competition and the sustainability of capital expenditures. Meanwhile, renewed tariff threats and inflationary fears are making some investors question just how much further this rally can run. Despite that, with over $6 trillion still sitting on the sidelines and elevated bearish sentiment hovering near 48% (per the AAII), market dips led by fear sell-offs could present buying opportunities rather than signals to retreat or cash out and sit on the sidelines.

Sector Concentration: A Lesson from History

A recurring question on our calls and meetings is whether it’s folly that major mutual funds, ETFs, and even the S&P 500 is so tech-heavy – and how to profit from the tech sector concentration while at the same time hedging against the unknown on the Vegas strip of Wall Street. Sure, tech is the market heavyweight today, but history shows that no stock or sector holds the crown forever. Consider the following recently covered in the WSJ? “What You Should Do About the Stock Market’s Giant Problem:”

• In 1812, financial stocks (banks and insurers) made up 71% of the U.S. stock market.
• By 1900, railroads commanded 63% of the market.
• In 1980, energy stocks dominated, with oil and gas companies comprising 28% of the S&P 500.
• The late 1990s saw tech hit 29% of the index in the dot-com era.

Fast forward to today: Tech’s weighting is hovering near 32%, its highest in history. Consider even when placing concentrated bets on individual notorious stocks that even the S&P 500 is constantly evolving itself – only 66 companies from 1985 still remain in the index. Leadership shifts, Industries change and evolve.

The Market Broadens Through Sector Rotation

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