Software Eats Market Cap Too

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Software Eats Market Cap Too

Bad news: Google missed on revenues after the close today, sending the stock down 7% after hours.

Good news: if you are overweight the S&P Technology sector, this actually means nothing to you. Google is part of the Communications Services sector, not Tech. Ditto for Netflix and Facebook, by the way. And Amazon isn’t Tech either; it resides in the Consumer Discretionary bucket.

We’ve touched on this theme in prior reports, but today we want to answer a broader question: what is the actual Tech exposure in the world’s major equity indices? Four answers here:

#1: Tech, properly considered, is at least 31% of the S&P 500. The math:

  • Officially, the sector is 21.6% of the S&P.
  • Add Amazon (3.3%), Alphabet/Google (3.2%), Facebook (1.9%) and Netflix (0.7%) and you get to 30.7%.
  • If you want to be even more rigorous, you can include Activision (0.2%), Twitter (0.1%), and Electronic Arts (0.1%), all in Communication Services, which in aggregate makes the S&P 500 weighting to Tech 31.1%.
  • And that doesn’t even include whatever part of Disney’s (1.0% of the S&P) valuation that is tied to its disruptive Tech efforts despite its official status as a Communication Services company.

#2: The US small cap Russell 2000 has much less Tech exposure, however, at something closer to 17%:

  • The official Tech sector weighting here is just 15.5%.
  • The only standout exception is Etsy, categorized as Consumer Discretionary but certainly “Tech” in its business model and a 0.4% weight in the Russell.
  • Much further down the “non-Tech but really Tech” holdings list is Yelp, with a 0.2% weight, and iRobot, Roku, Liberty Expedia Holdings and Carvana all at the same 0.1% weight.
  • Add these up and you get 16.5%.

#3: Emerging markets (using the MSCI EM Index) are close to the S&P 500’s “Real Tech” weighting at almost 29%:

  • The headline Tech weighting here is 14.5%.
  • The heavyweights not included in that total: Tencent (7.3% including Naspers’ stake), Alibaba (4.5%) and Baidu (0.9%), which are categorized as Consumer Discretionary and Communication names.
  • Other names not included in “Technology”: NetEase (0.4%), JD.com (0.4%), CTrip (0.3%) and Naver (0.3%).
  • The total: 28.6%

#4: Developed non-US equity markets (Europe, Asia, Far East, or MSCI EAFE) are VERY underweight Technology in comparison to the S&P 500, Emerging Markets and even the Russell at just 7.0%:

  • EAFE’s headline Tech weighting is 6.3%.
  • Unlike the other examples here, there are not many obvious misclassifications. Sony (0.4% weight) and Nintendo (0.3%) are the only ones of note.
  • Total EAFE Tech weighting: 7.0%

Why all this matters: Marc Andreessen’s famous comment in 2011 that “Software is eating the world” is almost 7 years old but it still applies to how Technology writ large is swallowing global equity market capitalization.Thanks to the S&P’s reclassification of names like Google, Tencent, and other stocks last year it may look like Tech is no greater a part of the S&P 500 now than in 2011 when it was 18.6% of the index. But it clearly is, as the math above shows.

You know where DataTrek stands on all this: we believe that investing in US large cap disruptive technology is the surest path to outperformance even if it comes with occasional setbacks like Q4 2018. The only thing that would cause us to reconsider is a global/US recession, and the Data section explains why we don’t see that coming any time soon. Even with that optimism, we understand this is an increasingly concentrated bet, especially in US large caps. We just do not see any other dynamic developing to counter “software eating the world”, and stock markets along with it.