If it didn’t do anything else, the latest move to shake up the market may have actually brought a bit of market turmoil with the old lineup of S&P 500 industry sectors. A major goal was to break up the information technology sector, which had ballooned in value to represent roughly 26% of the capitalization-weighted S&P 500 Index (SPX).
The old telecom sector has been renamed communications services, boosted by 23 stocks with a combined market cap of nearly $3 trillion, based on reports by CNBC and The Wall Street Journal. Of these 23 stocks, six were formerly in information technology, and 16 were in consumer discretionary, according to an earlier CNBC report. Most notable among the new communications services stocks are FAANG members Facebook Inc. (FB), Netflix Inc. (NFLX) and Google parent Alphabet Inc. (GOOGL).
5 Ways The Tech Shuffle Is Creating Market Turmoil
Alphabet and Facebook had represented roughly 15.6% of the value of technology sector ETFs, and now will exert even greater influence on the new communications services sector, per CNBC, which estimates that these two stocks will represent about 45% of the latter’s value. Meanwhile, Apple Inc. (AAPL) will increase to almost 20% of the tech sector’s value.
Are There Any Defensive Plays Left?
The old telecom sector had been a strong defensive play for investors, but the new communications sector is tech-heavy, with a dividend yield that is dramatically lower and a valuation that is grossly higher, as explained below. Neena Mishra of Zacks said this, on CNBC: “The telecom sector is traditionally seen as a defensive sector and a value play. The revamped communications services sector will be seen as a cyclical sector with much stronger growth prospects.”
As noted above, Facebook and Alphabet represent about 45% of the new communications services sector. Meanwhile, the two biggest stocks in the revamped tech sector, Apple and Microsoft Corp. (MSFT), combine for only about 30% of its value. Based on the 10 largest stocks in each sector, communications is more concentrated than either technology or consumer discretionary.
Overall, the new communications sector will be 52% tech stocks, 28% consumer discretionary, and just 20% telecom. Interestingly, the 61% proportion of growth stocks in communications services is greater than their 47% share of the post-adjustment tech sector, and the forward P/E is leaping from 11 times earnings for the old telecom sector to 28 times earnings for communications services, per research by State Street and CFRA cited by CNBC.
Lower Dividend Yields
The previous telecom sector led the S&P 500 with a robust 5.4% dividend yield. The revamped communications sector sees that plummet to 1.7%, below the 1.9% yield for the entire S&P 500.
Big Tech Still Rules
The reworking reduces the weight of the technology sector from 26% to 20% of the S&P 500, leaving it still the biggest sector. Also, the reclassification game does not change the fact that the five biggest S&P 500 stocks, all members of the FAAMG group, still account for about 15.6% of the value of the entire index.