We lowered the S&P 500 Information Technology and Communication Services sectors from overweight to market weight on December 7, 2025. We did so because the two sectors together accounted for 45% of the S&P 500's market capitalization (chart). We were also concerned about the mounting uncertainties regarding the rate of return on hyperscalers' massive AI investments.
Since then, investors have concluded that the hyperscalers are also profitable semiconductor companies. Amazon, Google, and Tesla have been moving in that direction for a while. AI uncertainties have been repressed by the two sectors' record-setting forward earnings, which together account for a record 42% share of S&P 500 forward earnings.
In any event, we are sticking with our advice to market-weight the two sectors simply because we still believe in diversification across sectors. It's much easier to overweight Energy (as we recommended on April 20), which accounts for only 3.3% of the S&P 500's market cap.
Focusing now on the S&P 500 Information Technology sector, it is up 8.0% ytd. However, there is an unusually large spread between the winners and the losers (chart). The former are all IT hardware industries that stand to benefit from rapid AI adoption, while the latter include IT software and services that face existential risks from AI replacement. It's a classic example of Joseph Schumpeter's creative destruction model of capitalism.
Let's have a closer look at the sector's latest dynamics:
(1) High-tech accounts for a record 53.8% of nominal capital spending (chart). When the Digital Revolution began in the mid-1960s with the introduction of IBM mainframe computers, this percentage was just below 20%.
