tadamichi
Here’s a table that Refinitiv publishes only occasionally, but it’s valuable since it gives perspective on the S&P 500 sector’s market cap weight in the benchmark, versus that same sector’s earnings weight.
The problem in the late 1990s for large-cap tech wasn’t just the monstrous rally in the last 5 years of the decade, it was that the market cap ultimately dwarfed the earnings weight for technology in March 2000, – something to the tune of a 35% market cap weight versus a 13% earnings weight – by the late 1990s, early 2000s.
Today, note tech’s market cap weight of 30%, versus tech’s earnings weight of 23%: readers can see the ratio is much more closely aligned today than the late 1990s.
Maybe more interesting is that the Communication Services sector – Meta (META) and Alphabet (GOOG) (GOOGL) are the largest two names – have an earnings weight larger than the sector’s market cap weight: 10.2% earnings weight versus a 9% market cap weight.
In Consumer Discretionary where Amazon (AMZN), Tesla (TSLA) and Netflix (NFLX) are found, the market cap weight of the sector is 10.5%, versus the earnings weight of 7.7%, which again, is a reasonable ratio.
Summary/conclusion: The breakout in the S&P 500 last week above the January ’22 highs seems significant. The Nasdaq 100 broke above the old high in late December ’23, while the Nasdaq Composite has not breached its November ’21 high print of 16,212.23.
While everyone talks market P/Es in terms of valuation (and should) the market cap weight to earnings weight is another metric or ratio that bears watching.
This ratio was flagged many times in the late 1990s as a cautionary warning of what was to come, and it arrived in March 2000.
There are a lot of similarities to today’s stock market vs. the late 1990s, but the market cap weight to earnings weight ratio is far more reasonable today than 25 years ago.
None of this is advice or a recommendation. Past performance is no guarantee or suggestion of future results. All data sourced from IBES data by Refinitiv. Readers should gauge their own comfort level with market volatility, and adjust accordingly if needed.
Thanks for reading.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
