Is It Time For Investors To Consider Sector Rotation Amid A Tech-Heavy S&P 500?

Stocks are up 18.7% year-to-date, which is good news for portfolios and 401(k)s, but did you know that most of the heavy lifting has been done by a very small number of S&P 500 stocks?

You may be surprised to learn that more than 80% of gains so far in 2023 are due to the performance of only 10 companies, starting with Apple. The iPhone maker, valued at just under $3 trillion, contributed a not insignificant 15.6% to the market’s moves.

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Apple was followed by a who’s who of mostly Silicon Valley and artificial intelligence (AI) companies. These include, in descending order, graphics card manufacturer NVIDIA (responsible for 15.4% of the gains), Microsoft (12.0%), Google parent Alphabet (9.6%, combining Class A and Class C shares), Amazon (8.6%), Facebook parent Meta Platforms (7.0%), Tesla (6.5%), semiconductor firm Broadcom (2.7%), drugmaker Eli Lilly (2.7%) and Adobe (1.8%).

There are a number of implications here that investors should be aware of, the most important being a lack of diversification. Investors who own an S&P 500 index mutual fund or ETF may be more exposed to concentration risk than they realize. Because the S&P is capitalization-weighted, superstar companies like Apple and Microsoft have a disproportionately massive impact on the index’s performance.

Also consider vulnerabilities to sector-specific risks. Most of the S&P 500’s gains in 2023 came courtesy of a single sector: technology. Any regulatory changes, economic shifts or other potential risks affecting tech will, once again, have a disproportionate influence on the index and any portfolios tracking it.