Chip stocks now dominate S&P 500 index for first time

By Emily Bary

Chip stocks now outweigh software stocks in the S&P 500 and have the largest overall sector weighting

It's felt like the chip sector's market for some time, but now that's official by a notable metric.

Chip stocks make up the heaviest weighting within the S&P 500 SPX for the first time, overtaking the software sector in recent days. The changing of the guard reflects Wall Street's optimism about the semiconductor sector's ability to capitalize financially on artificial intelligence and concerns about customer budget pressures within the software industry.

Plus, it captures the intersection of those two trends, as investors rotate out of software in favor of chips.

Strategas strategist Todd Sohn highlighted that chips were on the brink of achieving this feat in a note to clients on Tuesday. At the time, the chip sector's 11% weight in the S&P 500 marked a new high and represented a sizable increase from its early 2014 weighting of just 2%.

Meanwhile, the combination of the top five sectors by weight was 27%, the highest level going back through 44 years of data, Sohn said.

On the flip side, "software feels about as uninvestible as you could get right now," Mizuho desk-based analyst Jordan Klein wrote in a recent note to clients.

Trends in the software sector could worsen before they improve, according to Klein, given how many companies have recently highlighted that the macroeconomic climate is causing customers to delay deals and become more cautious about their spending.

The poster child for that dynamic was Salesforce Inc. (CRM), which saw its stock get walloped earlier this week after management cut its forecast and discussed "elongated deal cycles, deal compression and high levels of budget scrutiny."

Read: Salesforce's stock tumbles as earnings provide latest dose of software-sector pain

Other cautious signals came from MongoDB Inc. (MDB), UiPath Inc. (PATH) and Nutanix Inc. (NTNX) as the iShares Expanded Tech-Software Sector ETF IGV ended up logging its biggest weekly drop since the period that ended Nov. 4, 2022, according to Dow Jones Market Data.

See also: Why UiPath shares cratered to their worst day on record

That software ETF is off about 4% so far this year, and it's ahead 19% over the past 12 months, lagging the S&P 500's 11% and 26% gains over those respective periods.

Chip stocks, though, are on a tear, with the PHLX Semiconductor Index SOX up 23% so far in 2024 and 48% over a 12-month basis. Nvidia Corp. (NVDA) has fueled the sector's rally through its continued explosive financial growth, which has sparked enthusiasm about the potential for other companies to cash in on AI riches down the road.

Software companies talk up AI as well, but they're not seeing that trend translate into much new demand or growth, Klein noted, which could extend the rotation out of the sector.

Across the tech sector, valuations are likely the biggest worry, according to LPL Financial Research Chief Equity Strategist Jeff Buchbinder.

"Expectations for future profits are currently high, leaving little margin for error," he wrote in a report earlier this week. "Technology has commanded high valuations in the past for disruptive innovations, as was the case in the 1990s, and it can be hard to value such a massive future opportunity. What appears certain is the investments in AI are significant and the benefits, over time, are likely to be as well."

-Emily Bary

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06-01-24 0657ET

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