Software Getting Skinny

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In the past couple of weeks, we have repeatedly highlighted the weakness in the software stocks. Fears that AI will pose a significant threat to the sector have caused large losses in terms of both price and weighting. In the charts below, we show the industry's weighting in the S&P 500 versus other industries within the Tech sector. Last Thursday, the Software and Services industry saw its market cap as a share of total S&P 500 market cap fall below 9% for the first time since July 24, 2011.  A significant portion of that drop has come from a dramatic move over the past several months; however, that is also in the context of a longer-term drawdown since the peak weighting in the summer of 2018, shortly before a reclassification that shifted several large-cap Tech names into other sectors.

The recent declines also put the software industry's weighting on par with one of its peers in the Tech sector: the Tech Hardware and Equipment industry. In fact, at the low last Thursday, Software saw its weighting in the S&P 500 fall below that of Tech Hardware and Equipment for the first time since April 30, 2010.  Whereas there have been steadier trends in software weighting over the long run, Hardware and Equipment has seen a relatively stable range of readings in the mid to high single digits since the early 2000s. That followed extremely elevated weights that crossed into the mid-20% range during the height of the Dot Com era. Fast forward back to today, even with the lower weighting in Software recently, Tech hardware hasn't been picking up much.

The third and final industry that comprises the Tech sector is Semiconductors, and its weight trend is the polar opposite. This is a group that has been an absolute star of the show since AI came to the mainstream in late 2022, and as a result, it is now hovering around a record share of the S&P 500's market cap. Today, its weight is up to 14.3%, which is again still a far cry from the Tech Hardware and Equipment Industry over a quarter century ago. That also leaves software in the dust as there is now a record 5 percentage-point difference in the weightings of the two industry groups.

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