Big Tech stocks rally, as tech now drives S&P 500 more than on Election Day 2016

MW Big Tech stocks rally, as tech now drives S&P 500 more than on Election Day 2016

By Christine Idzelis

'A lot has happened inside the S&P 500 over the last four and eight years, explaining why the index trades so rich to 2016,' says DataTrek co-founder Nicholas Colas

Big Tech stocks were rallying Tuesday as Americans cast their vote for the next U.S. president, fueling the S&P 500's sharp gain in afternoon trading.

The S&P 500 SPX was up 1%, with Tesla Inc. $(TSLA)$ jumping 4.5%, Nvidia Corp. $(NVDA)$ climbing 2.4% and Amazon.com Inc. $(AMZN)$ and Facebook parent Meta Platforms Inc. $(META)$ each jumping almost 2%, FactSet data show, at last check.

"The market setup going into Election Day 2024" is one in which technology drives the S&P 500 much more than in 2016 and 2020, said Nicholas Colas, co-founder of DataTrek, in an emailed note. "We continue to be bullish on U.S. large caps and believe that the most likely path for stocks through year-end is higher regardless of which candidate wins the presidential election."

The U.S. stock market has a much higher valuation compared to Election Day in 2016 based on where the S&P 500 is trading relative to its earnings over the next 12 months, according to Colas. But the S&P 500's price-to-earnings ratio is now similar to Election Day in 2020.

"A lot has happened inside the S&P 500 over the last four and eight years explaining why the index trades so rich to 2016 and so close to 2020's elevated valuations, driven by fiscal and monetary stimulus," said Colas.

The S&P 500 has become more expensive since 2016 as the weightings of the technology sector and so-called Big Tech companies have increased in the index, according to DataTrek. Chip maker Nvidia has seen its weight rise to 6.9%, from 0.7% on Election Day in 2016.

The market value of Nvidia, a popular artificial-intelligence play in the S&P 500's information-technology sector XX:SP500.45, has surged amid investor enthusiasm for AI. The tech sector's weighting in the index has swelled to 31.7%, from 21.4% on Election Day 2016, the Data Trek note shows.

Tech and "tech-adjacent" companies have "such an important weighting" in the S&P 500, said Dominic Rizzo, a portfolio manager for the T. Rowe Price Technology ETF TTEQ, in a phone interview Tuesday. The fast growth in these areas of the U.S. stock market and their concentration in equities indexes raises the stakes for investors when making allocation decisions around tech, he said.

The Roundhill Magnificent Seven ETF MAGS - which holds Big Tech stocks including Apple Inc. $(AAPL)$, Microsoft Corp. $(MSFT)$, Google parent Alphabet Inc. $(GOOGL)$ $(GOOG)$, Amazon, Nvidia, Tesla and Meta - was up a sharp 1.7% on Tuesday afternoon, as investors watched for Election Day updates on the tight presidential race between Democratic candidate Kamala Harris and Republican rival Donald Trump.

DataTrek found that Big Tech companies outside the S&P 500's technology sector - such as Amazon, Meta and Alphabet - also have heftier index weights compared to eight years ago. Tesla, another Big Tech company that falls outside the tech sector, was not even in the S&P 500 in 2016, with the electric-car maker added to the index in late 2020.

The S&P 500's tech sector plus Big Tech names beyond the sector, in areas including consumer discretionary and communication services, now account for 43.2% of the S&P 500, versus 39.1% on Election Day 2020 and 27.7% on Election Day 2016, the DataTrek note shows.

The actively managed T. Rowe Price Technology ETF takes an expanded view of technology, meaning that it goes beyond the classification of tech in the S&P 500 to include Big Tech stocks such as Amazon, Meta and other companies globally, according to Rizzo.

The fund, which launched in October, invests around 75% in the U.S. and about 25% internationally, he said. The ETF's top 10 holdings on Tuesday included Nvidia, Apple, Microsoft, Amazon, Taiwan Semiconductor Manufacturing Co. $(TSM)$, Meta, Advanced Micro Devices Inc. $(AMD)$, Tencent Holdings (HK:700) (TCEHY), Visa Inc. (V) and Mastercard Inc. $(MA)$, according to data on T. Rowe Price's website.

Rizzo said he looks for "linchpin technologies" when picking stocks, seeking buying opportunities in "innovative and secular growth markets" and companies with "improving fundamentals and reasonable valuations."

Considering the "spectacular" growth rate of earnings for Big Tech stocks, valuations across the so-called Magnificent Seven are "roughly fair," he said.

DataTrek's note shows that the S&P 500's tech sector is valued at 28.4 times forward 12-month earnings, up around 35% from the 10-year average. Colas pegged Nvidia's multiple at 40 times forward-year earnings.

"Common wisdom has, at various points, said that tech-sector valuations would decline in the face of higher rates," said Colas. "Not only has that proved wrong, but tech in fact has seen the greatest multiple expansion of any S&P group relative to its longer-run average."

Read: Bond-market 'vigilantes' appear to be in 'driver's seat' before election, Fed meeting

-Christine Idzelis

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November 05, 2024 14:31 ET (19:31 GMT)

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