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Could S&P 500 revamp spell end for tech bull market?


This coming Friday Standard & Poor’s, the company tasked with compiling the S&P 500 index, among others, is going to make some big changes to the composition of the telecommunications component of that index. It will now be called Communications and 13 companies in the Consumer Discretionary segment will be moved into it. These will include Walt Disney, News Corp, CBS and Netflix.

On top of this, six technology stocks will be joining them: three from video games development, and giants Alphabet, Facebook and Twitter.

The changes reflect how technology is changing the way many commercial sectors work, including the way the telecoms sector is being hollowed, to the extent that it has become quite a poor performer over the last five years.

“The changes to index composition could drive flows into and out of the S&P 500 sectors and specific stocks, not least because of how tracker and exchange traded funds will need to respond to new sector weightings and rebalance their holdings so that they can best replicate the new sectors’ composition and provide investors with tracking performance as accurately as possible,” explains Russ Mould, investment director at AJ Bell.

According to information from ETF provider iShares, Information Technology will drop from 26% to 20% of the S&P 500 as a consequence. Consumer Discretionary will drop from 13% to 10% of the headline index, while Communications Services will now constitute a whopping 11%!

This could set off short term fund flows out of the stocks that have shifted from Technology to Consumer Discretionary. The imbalance caused by bigger funds selling stocks to reflect the lower weightings of tech and consumer discretionary stocks while smaller ones buy these names as they move into Communications Services could provide a short term challenge for companies like Netflix.

Netflix has been having a rough summer already as its customer acquisition rates have come off and investors are already concerned over its cash burn rate. But more broadly, analysts are asking whether the shift could mean that the surge in the price of technology stocks could be stemmed.

They look back to 2016 when Standard & Poor’s carved out the Real Estate sector from Financials, making it a stand alone group of stocks in the index. This pretty much called the top in the fortunes of the Real Estate sector, which has since been challenged by concerns over the impact of online shopping on bricks and mortar, a trend that has persisted into 2018. The new Real Estate sector has paddled sideways while the rest of the S&P 500 index has pushed on.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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