What To Do About Over-Interest In Tech

Want diversification? I would say screw it.

Tech stocks ($COMPQ) have dominated, and the concentration is getting so one-sided that many cannot even believe it.

The rest of the U.S. economy is shrinking as tech stocks make higher highs.

All the fresh capital is pouring into the A.I. narrative in a sink-or-swim moment for American innovation.

If this goes bust, the downside looks steep.

However, the pain trade takes us higher as we take a magnifying glass to search for cracks in the tech trade.

How concentrated are tech stocks now?

The U.S. IT sector accounts for approximately 31.7% of the S&P 500.

However, when including tech-related stocks from other sectors (e.g., Amazon and Tesla in consumer discretionary, Alphabet and Meta Platforms in communications services), the combined weight of technology and tech-related stocks is estimated to be around 40.4% to 55% of the S&P 500.

Mega-cap companies like Nvidia, Microsoft, Apple, Amazon, and Alphabet have been a primary driver of S&P 500 gains.

For instance, in 2023, seven mega-cap tech stocks contributed 83% of the S&P 500’s 14.1% year-to-date return.

Technology companies are at the forefront of innovation, particularly in areas like artificial intelligence, cloud computing, and digital services. Their dominance reflects their role in driving productivity, efficiency, and growth in the U.S. economy, which can lead to job creation and global competitiveness.

Mega-cap tech companies often have strong balance sheets, significant cash flows, and global market presence, making them relatively stable investments during economic uncertainty. Their inclusion in the S&P 500 provides a degree of resilience to the index.

The size and influence of U.S. tech giants enhance the country’s economic power globally, as these companies dominate international markets and set technological standards.

There is absolutely no reason to look at anything else.

If a company isn’t already competing in A.I., then don’t even look at them.

Many of these companies will be swept in the dustbin of history like the Blackberry phone when Steve Jobs created the iPhone.

When we look at the raw numbers, the left behind tech companies simply will not and cannot move the needle of indices when they have market caps that pale in comparison to the $4 trillion and growing of some of the heavyweights.

I remember it was just the other day when $1 trillion was a big deal.

Now it’s peanuts.

The big grow bigger, and investors who have shunned the handful of companies that are marching towards $5 trillion in market cap have been burned.

While tech-driven innovation fuels economic growth, the heavy reliance on a few companies creates fragility. A tech sector downturn could ripple through the economy, affecting jobs, investment, and consumer confidence.

The S&P 500 is a key indicator of economic health, influencing consumer and business confidence. A tech-heavy index means that market sentiment is disproportionately tied to the performance of a few companies, potentially leading to exaggerated swings in economic outlook based on tech sector news.

Use any dip to add to quality names.

The liquidity and leverage are there, and the path of least resistance is higher.