S&P share price rises to record high – US technology giants slow down share price

US technology giants are preventing the S&P 500 from hitting a record high, reversing the industry’s role as a mainstay of the US blue-chip benchmark over the past 18 months.

After a weak US jobs report rocked global markets at the start of the month, the S&P quickly recovered most of its losses, rising 1 percent on Friday and closing just 21 points below its record high reached in mid-July.

However, a final breakout above this level has been difficult, even though the majority of stocks in the index have gained since reaching a new high over a week ago.

The fact that this hurdle could not be overcome is largely due to the weak performance of the technology companies from Silicon Valley, which were in the greatest demand in the first half of the year.

“It’s the opposite of what happened before,” said Kevin Gordon, chief investment strategist at Schwab. “They’re being dragged down by some of the mega-caps…”[and]I wouldn’t be surprised if this momentum continues.”

Nearly 70 percent of the companies in the S&P 500 have gained since their July 16 peak, according to data compiled by Bloomberg. If every company in the S&P were equally weighted, the index would have hit a record high again on August 23.

But technology and communications services have a disproportionate weighting in the S&P, accounting for about 40 percent of the total value, even when Amazon and Tesla are categorized as consumer groups.

Instead, their sluggish returns have become an anchor since July. Sixteen of the S&P 500’s 20 biggest drags since its last record have been technology companies, led by six of the so-called “Magnificent Seven” – Microsoft, Amazon, Alphabet, Tesla, Apple and Nvidia.

The exception is Meta, which has risen since mid-July but is still 4 percent below its peak. Chipmakers and their suppliers such as Broadcom, Qualcomm, AMD and Applied Materials were among the other major drags.

Their leaden returns since July stand in sharp contrast to those in 2023 and the first half of this year, when excitement about the potential of artificial intelligence led to a massive rally in semiconductor stocks and other big technology companies expected to be among the first beneficiaries of AI.

While most of them did not experience a sudden downturn in corporate performance, the extent of the recovery sparked widespread debate about whether share prices were simply too high.

Bloomberg’s Magnificent Seven Index has fallen 10 percent since its peak in early July, but on a price-to-earnings basis the decline has been even steeper. This week it traded at 33 times forward earnings for the next 12 months, which is still higher than the broader S&P 500 but down 13 percent from its peak.

Investors placed high demands on the major technology companies during the last quarterly reporting season, and many of them were punished even after releasing strong results.

Nvidia, which alone contributed more than a quarter of the S&P’s rise in the first half of the year, lost six percent on Thursday despite better-than-expected results. Alphabet and Microsoft reacted similarly negatively to their solid results.

In contrast, the equally weighted S&P 500 is trading at its highest since February on a price-to-earnings basis. Smaller companies and more cyclical sectors benefited from reassuring economic data, positive earnings reports and encouraging comments from Federal Reserve Chairman Jay Powell, who told the annual Jackson Hole economic symposium that “the time has come” for the Fed to start cutting interest rates.

“One of the bigger themes next year is going to be a widening of the market,” said Francis Gannon, co-chief investment officer at Royce Investment Partners, which specializes in small-cap investing. “It usually starts out jerky … but I think we’re on the right track.”

The Russell 2000 index of smaller companies is up 8 percent so far this quarter, compared to a 3 percent increase in the S&P 500. Within the S&P 500, interest rate-sensitive sectors such as real estate, utilities and financials have been the best performing areas.

The debate surrounding the technology sector is far from over, however. Schwab’s Gordon said many investors are “exhausted” by the AI ​​trade, but stressed that even after a “necessary and understandable catch-up” by other sectors, the technology sector is still by far the best-performing sector of the year so far.

And despite recent robust data, US economic growth continues to slow, which could put pressure on the rest of the market later this year.

“There are more downside risks,” said Drew Matus, chief market strategist at MetLife Investment Management, pointing to falling consumer savings and rising unemployment. “And if the Fed cuts as aggressively as the market is currently pricing in, [it would mean] nothing good is happening in the economy.”

Sebastien Page, Head of Global Multi-Asset and Chief Investment Officer at T. Rowe Price, said: “We have more debates between bulls and bears than usual on our committee.

“Interest rates are falling and yields are rising despite this weaker economic environment… [but] We have arrived back in quite expensive markets.”

Page said his division’s funds are positioned for continued outperformance in value stocks in the near term, but added, “We still like a lot of the big technology companies” and may pivot if the technology sector becomes oversold.

“The expectations for technology are very high, but it is not a tech bubble,” he added.

For many active investors, an expansion of gains away from the biggest names would be a welcome change, even if it would make large increases at the level of the leading index less likely.

However, those who truly believe in the potential of AI were not shaken in their faith by a small setback.

“We have all these discussions about ‘bubble, bubble, bubble’,[but]“Valuations are no longer comparable to those of 2000 or even 2021,” said Tony Kim, head of technology investing in BlackRock’s fundamental equity division.

“We are in the second year of a complete transition of the entire technology industry to this new thing called AI, and I think we have only just begun.”