For the First Time, Chip Stocks Dominate the S&P 500 Index

The prominence of the chip sector in the market has become officially notable by a key metric. For the first time, chip stocks have surpassed the software sector in weighting within the S&P 500. This shift reflects Wall Street’s confidence in the semiconductor industry’s potential to financially benefit from artificial intelligence (AI), coupled with concerns about budget constraints affecting the software industry.

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This trend illustrates a broader movement where investors are shifting their focus from software to chips. Strategas strategist Todd Sohn noted that chip stocks were on the verge of achieving this milestone in a recent client note. The sector’s 11% weight in the S&P 500 is a significant increase from its 2% weight in early 2014. Additionally, the top five sectors by weight now make up 27% of the index, the highest level in 44 years of data, Sohn highlighted.

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Conversely, the software sector appears less attractive to investors at the moment. Mizuho analyst Jordan Klein described software as “about as uninvestible as you could get right now” in a recent client note. He pointed out that many companies have indicated the macroeconomic environment is causing customers to delay deals and tighten their budgets.

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Salesforce Inc. exemplifies this trend. Its stock recently took a hit after the company lowered its forecast and discussed extended deal cycles and increased budget scrutiny. Similar cautionary signals came from MongoDB Inc., UiPath Inc., and Nutanix Inc., contributing to the iShares Expanded Tech-Software Sector ETF logging its biggest weekly drop since early November 2022.

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This software ETF has fallen about 4% year-to-date, and although it has gained 19% over the past 12 months, it still trails the S&P 500’s 11% and 26% gains for the same periods, respectively.

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In contrast, chip stocks are experiencing a robust performance. The PHLX Semiconductor Index has risen 23% so far in 2024 and 48% over the past 12 months. Nvidia Corp. has been a major driver of this rally, thanks to its continued explosive financial growth, which has generated excitement about the potential for other companies to profit from AI advancements in the future.

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While software companies also highlight AI, they are not seeing this trend result in significant new demand or growth, according to Klein, which could prolong the shift away from the software sector.

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Across the tech sector, high valuations are a primary concern, notes Jeff Buchbinder, Chief Equity Strategist at LPL Financial Research. He observed that “expectations for future profits are currently high, leaving little margin for error.” Buchbinder explained that technology has historically commanded high valuations for disruptive innovations, such as in the 1990s, making it challenging to value massive future opportunities accurately. Nevertheless, he acknowledged that investments in AI are substantial and are likely to yield significant benefits over time.

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