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 (as we are experiencing this week) could present buying opportunities for disciplined, contrarian investors, rather than signals to panic and cash out.
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
While Big Tech has carried the market through 2023 and 2024, 2025 is showing early signs of a shift to other market caps and sectors due to high tech valuations and some growing uncertainty on going up so far and so fast. The so-called S&P 493 and equal-weighted indices are catching up to the Mag 7’s performance, signaling a potential rebalancing of market leadership.
The chart below may not be a signal for the balance of 2024, but it is noteworthy that six major sectors were up 4.4% to 9% just in January along with a renewed acceleration of small and midcap stock indices, while big tech was down almost 3%. In mid- December we had already started deploying capital into U.S focused equal weight, healthcare, financial, materials, small caps, midcaps and other fixed income sectors indices we believed would help investors to maintain some footing in tech while at the same time providing a wider net to capture gains while conserving principal at the same time.
The fact that other sectors have rallied is a positive sign for many investors who have hoped for a broadening of performance from stocks and even some bond sectors. While it’s still early in the year, this wider market participation suggests a healthier environment where growth is not concentrated in just a few areas. It also highlights the search by investors for more attractive valuations across different parts of the market, after two and a half years of strong returns.
Key trends driving this broadening:
📉 Earnings Growth Convergence – The gap between the Mag 7 and the rest of the S&P 500 is expected to shrink, with earnings growth differentials narrowing from 8% to under 5% by year-end.
📊 Sector Resurgence – Health Care, Industrials and Financials are picking up steam, contributing more to market performance. Small and midcap sectors are slowly following suite and may continue if there is not great reinflation.
💰 Valuation Concerns – As tech stocks get pricier, investors may rotate into more reasonably valued sectors.
🔮 Market Projections – Goldman Sachs sees the S&P 500 hitting 6,500 by the end of 2025, while Oppenheimer is even more bullish with a 7,100 target—suggesting a broader market rally beyond just tech.
Jon here. Looking at the market landscape, we see the potential for high single-digit to low double-digit returns for the S&P 500 in 2025, though about a 5% drag is likely baked in for Trump’s tariff policies. Expect some choppiness, with 5% pullbacks and rebounds along the way. A third consecutive high double-digit year? Less likely. Investor sentiment, as measured by the Fear & Greed Index, leans toward fear, reflecting concerns over stretched valuations and the return of inflation.
Beyond market valuations, another key indicator to watch is credit spreads. As of February 13th, the ICE BofA U.S. High Yield Index Option-Adjusted Spread sat at just 2.65%—the lowest in two decades. This spread, which tracks the difference between U.S. high-yield corporate bonds and risk-free Treasuries, suggests strong consumer demand and favorable market conditions. While interest rates could rise (though not to post-2020 extremes), other factors may require investors to remain patient and vigilant in the months ahead.
Time in the Market- not Market Timing
With all the noise around AI, policy changes, and market leadership shifts, it’s easy to feel tempted to time the market. But history shows that trying to pick the perfect entry and exit points is a losing game.
As illustrated above by JP Morgan, If you had invested $10,000 in the S&P 500 mid- 2004 and left it alone for 20 years, you’d have over $70,000 by last year. But if you missed just the 10 best trading days, your total would be cut in half—to under $35,000. Missing the best 30 days would have cut your return by over 90%. Food for thought: Seven of those top 10 days happened within two weeks of the worst days in the stock market during corrections and crashes.
Bottom line? Zig-zag Market moves in January from tech sector concentration and tariff worries reaffirm the importance of a well-structured, diversified portfolio. Volatility will always be part of the ride, but staying invested—and avoiding the temptation to chase or flee—has historically been the best way to build wealth over time.
For more information on our firm or to request a complementary investment and retirement check-up with Jon W. Ulin, CFP®, please call us at (561) 210-7887 or email jon.ulin@ulinwealth.com.
Diversification does not ensure a profit or guarantee against loss. You cannot invest directly in an index.
Note: This content is for informational purposes only and should not be construed as financial, legal, or tax advice. Please consult your financial advisor, attorney, or tax professional regarding your specific situation.
You cannot invest directly in an index. Past performance is no guarantee of future returns. Diversification does not ensure a profit or guarantee against loss. All examples and charts shown are hypothetical used for illustrative purposes only and do not represent any actual investment. The information given herein is taken from sources that are believed to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as NewEdge Advisors, LLC does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors.
