Tech Stocks Rally, Driving S&P 500 More Than on Election Day 2016

Big Tech stocks saw a strong rally on Tuesday as Americans turned out to vote for the next U.S. president, propelling the S&P 500 higher. The index gained 1.2%, with significant increases from companies like Tesla Inc., Nvidia Corp., Meta Platforms Inc., and Amazon.com Inc., which advanced by 3.5%, 2.8%, 2.1%, and 1.9%, respectively.

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Nicholas Colas, co-founder of DataTrek Research, noted that technology plays an even bigger role in the S&P 500 now than during the 2016 and 2020 elections. “The market setup going into Election Day 2024 is one in which technology drives the S&P 500 much more than in 2016 and 2020,” he said. Colas maintained an optimistic view on U.S. large caps, expressing confidence that the market could rise through year-end, regardless of the election outcome.

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Compared to 2016, the U.S. stock market now holds a much higher valuation, particularly with the S&P 500 trading at a higher price relative to expected earnings over the next 12 months. However, Colas observed that the current price-to-earnings ratio aligns more closely with levels seen on Election Day 2020. He attributes this to substantial fiscal and monetary stimulus over recent years, which have contributed to increased valuations for the index.

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A considerable driver behind the S&P 500’s growth since 2016 is the expanded weight of the technology sector and major tech companies in the index. For instance, Nvidia, which has become an AI powerhouse, has increased its representation in the S&P 500, growing from a 0.7% share in 2016 to 6.9% today. Investor enthusiasm for AI has propelled Nvidia’s market value significantly, which has boosted the overall technology sector’s share in the S&P 500 to 31.7%, up from 21.4% in 2016.

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Dominic Rizzo, a portfolio manager for the T. Rowe Price Technology ETF, emphasized the growing importance of tech and tech-adjacent companies within the S&P 500. These companies hold “such an important weighting” in the index, he noted, suggesting that the rapid growth and concentration of these sectors make investment decisions around tech especially critical for investors.

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On Election Day, the Roundhill Magnificent Seven ETF, which contains a range of Big Tech stocks such as Apple, Microsoft, Alphabet (Google’s parent), Amazon, Nvidia, Tesla, and Meta, rose by 1.7%. The fund’s gains reflect investors’ interest in updates from the election, where the close race between Democratic candidate Kamala Harris and Republican contender Donald Trump has heightened market attention.

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DataTrek observed that several Big Tech companies with substantial weight in the index, including Amazon, Meta, and Alphabet, operate outside the traditional technology sector. Tesla, which was not in the S&P 500 during the 2016 election but was added in 2020, has similarly gained influence. Together, technology stocks and Big Tech firms outside the tech classification now represent 43.2% of the S&P 500, up from 39.1% in 2020 and 27.7% in 2016, indicating the sector’s rapid growth and increased importance.

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For those looking to specifically target—or avoid—Big Tech and mega-cap stocks in the face of the ongoing AI surge, the T. Rowe Price Technology ETF offers a broader scope of technology investments than the standard tech sector in the S&P 500. According to Rizzo, the fund, launched in October, has around 75% of its investments in the U.S. and 25% internationally, going beyond typical tech classifications to include large tech firms like Amazon and Meta.

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The ETF’s top holdings as of Tuesday included U.S. giants like Nvidia, Apple, Microsoft, and Amazon, along with Taiwan Semiconductor Manufacturing Co., Meta, and Advanced Micro Devices (AMD). It also held stakes in international companies like Tencent Holdings, Visa, and Mastercard, showcasing a diversified mix of companies involved in “linchpin technologies.” Rizzo explained that when selecting stocks, he focuses on companies in innovative and growth-oriented markets with “improving fundamentals and reasonable valuations.”

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Despite the high valuations for Big Tech, Rizzo views them as “roughly fair” given the strong earnings growth across the so-called Magnificent Seven. The S&P 500’s tech sector, for instance, is currently valued at 28.4 times forward earnings over the next 12 months, around 35% above its 10-year average. Meanwhile, Nvidia, which has a strong AI-focused portfolio, trades at 40 times forward-year earnings, a level that reflects its pivotal role in the AI boom.

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Colas highlighted that contrary to the belief that tech-sector valuations would dip in a high-interest-rate environment, technology stocks have instead experienced the most significant valuation expansion of any sector in the S&P 500. “Common wisdom has, at various points, said that tech-sector valuations would decline in the face of higher rates,” he remarked. “Not only has that proved wrong, but tech in fact has seen the greatest multiple expansion of any S&P group relative to its longer-run average.”

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This resilience in tech valuations reflects how the sector’s growth potential, especially with AI advancements, continues to captivate investor interest. With Big Tech companies now holding an outsized influence in the S&P 500, their performance and market dynamics are crucial indicators as investors weigh allocation decisions in the evolving market landscape.

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