The technology sector has been at the forefront of the S&P 500’s impressive rally over the last decade. FAANG – consisting of Facebook, Amazon, Apple, Netflix, and Google’s parent company, Alphabet – along with other tech giants like Microsoft, have consistently outperformed the broader market. However, questions have started arising about the future of this tech-driven bull market, particularly if non-tech sectors can maintain or even boost the S&P 500 rally without the dominance of technology stocks.
Historically, sector rotations have been an essential part of market cycles. Traditionally, when one sector begins to lose momentum, others rise to take its place. However, the tech sector’s particular influence has somewhat altered this traditional cycle, primarily due to the robust growth and significant weightage of technology within the S&P 500 Index.
Yet, the future is impossible to predict with absolute certainty and questioning whether the S&P 500 can rally without the tech sector is a pertinent concern. While past performance does not guarantee future outcomes, an examination of past shifts in market leadership can provide some useful insights.
Consumer Discretionary and Healthcare sectors are two potential leaders in a non-tech-driven rally. Consumer discretionary companies, especially those that have adapted well to online business models, have shown resilience during economic downturns and robust growth during economic recoveries. Prolific examples of this include Home Depot and Nike, which have showcased sound financial performance and displayed a tremendous capacity for innovation.
On the other hand, the Healthcare sector represents another promising sector. With an aging global population and the ever-present need for healthcare services and innovation, companies within this sector are poised for significant growth. This has been exemplified during the COVID-19 pandemic, wherein healthcare companies played a crucial role, ranging from vaccine development to telehealth services.
The Financial sector is an often-overlooked player that could lead the rally. The anticipation of higher interest rates and an improved economy could benefit financial institutions. Banks’ net interest margins benefit from a steepening yield curve, which develops as the economy recovers and interest rates rise.
Cyclical sectors, which traditionally do well during economic recoveries, could also potentially lead the market rally in the absence of tech stocks. These include Energy and Industrials. The Energy sector, in particular, after being pummeled in early 2020, could make a substantial comeback as oil prices rise with global economic recovery.
The Industrials sector, backed by the promise of significant infrastructure spending, can also witness solid growth due to increased demand for their products and services. Moreover, Real Estate, with its natural hedging capabilities against inflation, could also present a valuable player in leading the S&P 500 rally.
The bottom line is the S&P 500 can rally without tech, but it would require significant growth and momentum from various other sectors. Holding a diversified portfolio becomes crucial, spreading investments across sectors to mitigate potential losses and capitalize on shifts in market leadership.
While the technology sector provides a significant influence, it is not the be-all and end-all of market performance. Other sectors have the potential to step into the limelight in unprecedented ways, offering investors new opportunities for growth. Indeed, the S&P 500 Index, with its wide range of constituent firms and industries, is larger than the sum of its parts. The possibility of rallying without tech highlights the dynamism and vast potential within the market.
