Capital Perspectives: A deep dive into S&P 500 sectors
“Everything should be made as simple as possible, but no simpler.”
– Albert Einstein
The above quote is nice standby when the news cycle, like now, seems so impossibly complex and overwhelmingly fast-paced. In the same spirit, being mindful of very large dislocations from historical valuation norms is a simple thing that, when pursued in a disciplined fashion, can be an investment edge. Below I share brief thoughts regarding the investment merits of the eleven S&P 500 sectors in light of valuations, past performance and the perceived fundamental backdrop. Note: Due to space constraints, this sector commentary will be split into multiple submissions. Given the outsized importance of the Information Technology sector to the overall market, today’s comments will focus solely on it.
As with other recent columns, when I discuss valuation, I am taking the sector’s current (Current as of the middle of the fourth quarter when writing my 2024 Annual Positioning Report) forward P/E multiple using consensus EPS estimates, per Bloomberg, for 2025 and 2026 and comparing those reading to its own 10-year median. So, if a sector’s trailing 10-year median forward P/E was 10x and it is trading for 12x, we would regard this as a more expensive reading than a sector with a 10-year median of 20x trading for 22x (i.e., The former is at a 20 percent premium to its own history while the latter is just 10 percent).
Information Technology – Despite underperforming in 2022, this sector has been a significant outperformer over the last 10 years and especially strong in 2023 and 2024. However, tech screens the most expensive of the 11 S&P 500 sectors relative to its historical valuation norm. Clearly, the recent release of Deepseek, a Chinese AI application, has challenged some consensus views about this emerging technology. To give you an idea of how the consensus view has evolved, here is the price performance of the Mag 7 stocks (Note: Only Nvidia, Apple and Microsoft are member of the Information Technology sector, the other Mag 7 stocks reside in the Consumer Discretionary and Communication Services sectors.) since the January 24th close: Nvidia -16%, Apple +4%, Microsoft -7%, Tesla -5%, Alphabet +3%, Meta +9% and Amazon -1%. Mr. Market seems to be telling us that he now thinks open-source AI can be built with less expensive chips (bad for Nvidia) and capital investment generally, reducing the economic moat of first movers like OpenAI (bad for partial owner Microsoft) to the benefit of other big tech companies with competing applications. Mr. Market, as always, reserves the right to change his mind.
My next submission will continue our evaluation of the eleven S&P 500 sectors, with a special emphasis on Financials.
Chas Craig is principal at C.E.C. Wealth Management (www.cecwm.com).