Meet the new tech sector, as Facebook and Alphabet prepare to exit

The stock market is about to undergo a major transformation.

After the bell Friday, around $2.8 trillion in equities will be reshuffled into the newly created communications services sector.

Those changes will leave the tech sector looking a little different to investors.

“What’s going to be left of the technology sector is going to be largely driven by the hardware and the software and services space,” explained Lindsey Bell, investment strategist at CFRA Research, on CNBC’s “Trading Nation” on Thursday.

Among the biggest changes, Facebook and Google parent Alphabet will move out of tech into the new sector. Apple‘s leadership will expand to a 21 percent weighting, up from 17 percent, while Microsoft will place second with a 17 percent weighting from 13 percent.

Apple and Microsoft as the two biggest drivers should continue to lead gains in the tech sector after the move, says Bell.

“As those two companies switch to face higher growth and higher margin businesses — services within Apple and cloud within Microsoft — you will continue to see strong growth out of the tech sector,” she said.

The tech sector will also become more weighted to volatile chip stocks such as Advanced Micro Devices and Micron, but Bell believes that could be a positive.

“Semiconductors — they were 14% of the market cap, they’re going to be about 17 percent — they should continue to weigh, but earnings estimates have come down so significantly right there that we think that you’ll still be able to have solid growth out of this sector overall,” said Bell.

Earnings growth for semiconductor stocks has been reduced to 6 percent in 2019, down from 26.5 percent, according to CFRA Research. Lowered estimates make for easier analyst beats come reporting season.

It’s not just tech seeing a big change. The new communications sector will absorb the telecom space, ending its reputation as a defensive play.

“Even though the media stocks have high dividends, they’re just going to be such a small component of the new sector,” said Bell. “A lot of people like the sector because of the 5.4 percent dividend yield. It was a bond proxy, but now it’s going to be closer to about 1.5 percent.”

Alphabet will have a 29 percent weighting in the new sector, while Facebook will account for nearly 16 percent. Neither offers a dividend.

Be the first to comment

Leave a Reply

Your email address will not be published.