The only time the tech sector has been more valuable than this, relative to the financials, was at the very peak of the Dot-Com bubble in March 2000.
From there it was a precipitous drop back to reality…
And while we ‘know’ it’s different this time, andespite the stronger fundamentals of the technology sector today relative to the period 20 years earlier, the high weight of the technology sector, particularly in some markets, raises the question of sustainability.
Goldman Sachs asks (and answers) – What can history tell us about the longevity of sector dominance? How big can a sector or stock get? (Spoiler Alert – a lot bigger and a lot longer)…
Sector dominance in the market
Looking at the history of the sector composition of the S&P 500 as a benchmark we can see that sector dominance is not new.
We can split the long sweep of history in the US equity market into 4 main periods of leadership.
1) 1800 – 1850s Financials
Over this period banks were the biggest sector. Starting with almost 100% of the equity market, the stock market developed and broadened out. By the 1850s, the sectors weight had more than halved.
2) 1850s – 1910s Transport
As banks started to ﬁnance the exploding railroad system in the US (and elsewhere for that matter), transport stock took over as the largest in the index. In their boom years they reached close to 70% of the index in the US before fading to around one third of the market capitalisation by WW1 .
3) 1920s – 1970s Energy
With the huge growth of industry, powered by oil rather than steam and coal, energy stocks took over as the biggest sector. This continued as the main sector group until the 1990s, although interspersed with brief periods of leadership from the emerging technology sector (in the ﬁrst wave it was lead by main frames and subsequently by software).
In the case of Europe, the sector dominance has been slightly different (see Exhibit 23).
We do not have the same history to compare with the US but, if we use the same broad 10 classiﬁcations we see industrials domination between the early 1970s and 1983 (with a brief period of commodities leading in 1980). Financials then took over as the dominant sector and have remained that way (with the exception of technology in 1999) ever since.
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Over time different waves of technology resulted in different phases of sector dominance; as stock markets have become more diversiﬁed the biggest sector has tended to account for a smaller share of the aggregate market over time… but the lesson is: this dominance can go on longer than you can remain solvent.
However, the silver-lining for Tech bears are both the extreme valuations relative to banks (above) and the fact that these dominant cycles have tended to run for 50-or-so years and Tech has been dominant in the US since the early ’70s.