It has been a good year for the technology sector. Tech stocks have been the best-performing for both the past three- and 12-month periods, and the tech sector in general has been the best performer year-to-date. Now, the tech sector accounts for nearly one quarter of the S&P 500 Index. While the run since 2008's financial crisis has been exceptional, the growing weight on the benchmark index has some analysts worrying about the stability of the tech area in the future. Are circumstances priming tech stocks for another bubble like the one in 1999? Or is there more room to grow?
From 15% to 23% of S&P 500 in 9 Years
In 2008, during the financial crisis, tech stocks made up 15% of the S&P 500 Index. Now, just nine years later, that sector accounts for 23% of the Index, the heaviest tech stocks have been since 1999's tech bubble, according to Schwab. Given just how substantially tech stocks have grown in the past few years, investors are wondering if the sector may have overextended itself. Some are seeing signs of a possible retrenchment or even the risk of a collapse. In 2000, tech stocks were 33% of the S&P 500, but by 2003 these names occupied only 14% of the Index.
In a recent report on the health of the tech sector, Schwab issued a prediction that the "tech sector still has more room to run." That is not to say, though, that there won't be dips in the area. However, Schwab analysts have noted some critical differences between the current tech run and the bubble period late in the 1990s.
Schwab Says Tech Not Overweight
Schwab's report suggests that tech stocks do make up roughly a quarter of the overall economy, meaning that their distribution in the S&P 500 is not excessive. According to Yardeni Research, the tech sector claims a 22% share of the earnings of the S&P 500, which is roughly in line with the distribution of tech names. That certainly seems more favorable than the figures for the tech bubble. At that time, tech's share of earnings was just 15%, while the sector enjoyed weighting of more than 30%.
That is not to say that concerns about valuations are not valid. Analysts often point to the FANG stocks, Facebook (FB), Apple (AAPL), Netflix (NFLX), and Google (GOOG) with these concerns. However, both Apple and Netflix are consumer discretionary companies, not tech names, strictly speaking. Ned Davis Research has shown that the tech sector has a forward price-to-earnings ratio between 18 and 19, which is just under the sector's 30-year average.
While it is always a good idea to maintain a diverse portfolio and engage in due diligence when picking new investments, there are some analysts who believe tech is still a safe bet for the time being.