This is the moment to reallocate some money to non-technology stocks.
Before this week, the largest 10 stocks by market value -- mostly tech stocks -- had almost returned to their highest percentage of the S&P 500 ever, according to RBC's chief U.S. equity strategist Lori Calvasina, who just downgraded her tech sector rating. When tech reaches that peak as a portion of the index, it often goes on to see at least months of underperformance.
That's why investors should allocate some money -- either by selling a few tech shares or using idle cash -- to non-tech, or what's plainly called the rest of the market.
"If one is concerned about 40 percent of the market cap weighted S&P 500 being in just 10 Tech/Big Tech stocks, substituting some of that holding for the equal weight index alternative automatically reduces that risk," write analysts at DataTrek.
The timing for such a reallocation is right, given that the selling outside of tech likely can't worsen much -- and could easily improve. Equity funds' allocations to non-tech are near their lowest levels since 2022, according to a Deutsche Bank survey, meaning that most of the selling appears to be over.
That opens the door to buying -- and stock gains -- if companies grow earnings. Analysts expect aggregate sales to grow about 5% annually from the end of this year through 2028, according to FactSet. The figure makes sense given that nominal gross domestic product growth (which includes price increases from inflation) has recently hovered in the mid-single digits. That can boost earnings per share by 11%; profit margins can inch higher as companies adopt AI, creating cost efficiencies, while many can also repurchase shares.
That brings economic growth into focus. Sure, the Federal Reserve has increased short-term interest rates to tamp down inflation, which could hurt the economy, but a few silver linings remain. Growth might slow, but recession is far from imminent: The probability of one occurring in 2027 is currently at just under 13%, down from 30% in March, soon after the start of the Iran war, according to the Federal Reserve Bank of New York.
The other silver lining is bond market signaling. While September inflation narrowly beat expectations, the 2-year Treasury yield, often seen as an indicator of future Fed decisions, dropped more than 10 basis points to a just under 4.8%. The bond market's message: It has almost fully priced in Fed rate hikes -- especially if inflation faces easy comparisons next year, with the energy price surge subsiding. So equity investors could soon anticipate a stabilization in yields, a boon to the already beaten down equal-weighted S&P 500.
Within the index's various sectors, look at a few rate-sensitive areas.
The State Street SPDR S&P Homebuilders exchange-traded fund, which owns retailers and construction companies that see demand fluctuate based on mortgage rates, is down 21% since its 2026 high, which it hit in February. If rates stabilize, so can these stocks, but if rates drop, the fund would surge.
Still, some investors might want stocks less tied to the economic cycle -- understandably. Nothing is guaranteed, not even continued economic growth. The good news is that investors can consider defensive sectors, those with more reliable earnings, that would also benefit from stabilizing rates.
The State Street Utilities Select Sector SPDR ETF is down 13% from its 2026 high, hit in February. Higher rates have hurt utilities stocks because many investors own them for their consistently growing dividends. When bond yields offer a more competitive return, money can leave utilities. If bond yields stop rising, utilities' earnings growth can push the stocks higher.
Utilities analysts see 9% annual EPS growth through 2028. The data-center and clean-power build-outs are increasing utility plant build-outs, which translate into higher earnings for the sector, especially because a handful of electricity providers have contracts that lock the data-center builders into their spending for years.
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