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Technology’s footprint in various broad market indexes is a much lamented point. As of Oct. 11, the sector accounted for 32.24% of the S&P 500 – more than double the weight assigned to the gauge’s second-largest sector exposure.
That’s the result of rising market values and as a result of that phenomenon cap-weighted S&P 500 index and exchange traded funds have bested their equal-weight counterparts for awhile now, which is something of a historical anomaly. For the three years ending Oct. 11, the cap-weighted S&P 500 is higher by 38.4% compared to a gain of 23.6% for the equal-weight index.
That chasm is almost solely attributable to differences in tech exposure. As noted above, tech accounts for almost a third of the cap-weighted S&P 500, but the sector represents just 14.14% of the equal-weight gauge, trailing industrials and financial services.
There are credible reasons for these gaps. Notably the earnings per share (EPS) contributions from the technology sector are driving a major earnings difference between the cap-weighted and equal-weight S&P 500 indexes. It’s estimated that2024 for EPS for the cap-weighted benchmark will be $9.43 a share or more than triple the $3 expected for the equal-weight index. Advisors should note that could change in significant fashion next year.
More Earnings Depth May Be Coming
This is not an endorsement of equal-weight S&P 500 index funds over the cap-weighted equivalents, but experts believe more earnings breadth is in store for 2025.
“However, this dominance is starting to show signs of change. Comparing the cap weighted S&P 500 index to its equal weighted counterpart reveals a changing story in projected earnings growth between 2024 and 2025,” notes State Street Global Advisors (SSGA). “Specifically, next year the equal weighted index is expected to catch up, with similar earnings, removing the lopsided differences. This shift could indicate a potential broadening of market leadership away from the giant large caps and toward ‘the rest.’”
Chart Courtesy: SSGA
Improved earnings breadth could certainly be a catalyst for the equal-weight S&P 500, but there’s no denying the cap-weighted index would likely derive some benefit from rising EPS contributions from sectors outside of tech.
EPS Pool Is Deepening
As highlighted by the cap-weighted S&P 500’s three-year run, high levels of concentration and one sector doing the heavy EPS lifting has served investors well.
Still, diversification is desirable and that’s particularly true when it comes to broad market earnings contributions. To that effect, satisfaction could increase next year.
“This rounding out of earnings illustrates more diversified opportunities in the market for investors. The equal weight index has a value tilt and greater exposure to cyclicals and smaller large-cap companies,” concludes SSGA. “Some non-tech sectors, like Health Care, Materials, and Industrials, are poised for much stronger earnings growth in 2025, with each expected to growth by more than 15%. This aligns with a potential rotation out of high-valuation tech stocks. We are cautious to say this is the end of the tech run, as it will always be a pillar of the US economy. However, in 2025, we may start to see a larger opportunity set within US large caps.”
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