Q3 2025: PFM Quarterly Commentary
We recently marked the seventh anniversary of an event that has received several fleeting mentions in these pages over the years, but is worthy of deeper exploration. Though seemingly routine and inconsequential, this occurrence, alongside a subsequent one, profoundly influenced the domestic stock market, reshaping valuations, fund flows, and public sentiment to a degree unmatched by most developments over the past two decades. Understanding its far reaching implications is essential for gaining insight into the market’s current state and its potential trajectory in the years ahead.
In the late 1990s, Standard & Poor’s and MSCI (Morgan Stanley Capital International) collaborated to create the Global Industry Classification Standard (GICS), establishing a standardized taxonomy for categorizing companies within indices like the S&P 500 into sectors, industry groups, industries, and subgroups. Introduced in 1999 to reflect the evolving business landscape shaped by the technology revolution of the prior years, GICS remained largely consistent for nearly two decades, with only minor adjustments to industry subgroups and the notable separation of Real Estate into its own sector distinct from Financials in 2016, forming the smallest sector at just over 3% of the index at the time.[i]
In September 2018, GICS underwent a transformative update that reshaped the market’s structure in profound ways. The Telecommunications sector, historically among the smallest in the S&P 500 and home to just five companies including AT&T and Verizon, was rebranded as “Communication Services.” This newly formed sector absorbed major technology players, including Google, Facebook (now Meta Platforms), and various interactive media and services companies, such as video game developers, previously classified under the Technology sector. Notably, technology giants Amazon and Tesla remained in the Consumer Discretionary sector, while Netflix was reassigned from Consumer Discretionary to Communication Services.[ii] In March 2023, GICS implemented another significant reclassification, shifting six prominent companies—Visa, Mastercard, PayPal, Fiserv, Global Payments, and Jack Henry & Associates—from the Technology sector to the Financials sector, further redefining the market’s composition.[iii]
The 2018 GICS reclassification significantly altered the market landscape, reducing on paper the Technology sector’s share in the S&P 500 from 26.3% to 20.6% as nearly $1.5 trillion in market capitalization shifted to the newly formed Communication Services sector.[iv] Notably, GICS chose to retain tech giants Tesla, Amazon, and Netflix, collectively representing approximately $1.2 trillion in market capitalization, or roughly 4% of the S&P 500, outside the Technology sector. The 2023 GICS update further reshaped the market, reassigning nearly $1 trillion in combined market capitalization, equivalent to approximately 2.9% of the S&P 500’s total value, from the Technology sector to the Financials sector.[v]
The significance of these shifts cannot be overstated. Technology has permeated nearly every aspect of modern life, and its dominance in financial markets is equally profound. In the current quarter alone, Nvidia and Microsoft each crossed the $4 trillion market capitalization threshold, with Apple close behind, surpassing the combined value of the Consumer Staples, Energy, Utilities, Real Estate, and Materials sectors.[vi] The core objective of investing in a broad-based index like the S&P 500 is to achieve diversified exposure to all segments of the economy, reflecting their underlying components. However, over the past decade, the meteoric rise of technology companies has so outstripped other sectors that reclassifying companies into different sectors—and even creating new ones—has become essential to prevent the S&P 500 from effectively transforming into a technology-focused investment. Furthermore, as companies evolve and new entrants join the S&P 500, their predominantly technology-driven nature exacerbates this imbalance.
In July, the Technology sector reached 33.6% of the S&P 500, matching the peak of the 1999 tech bubble—a period widely recognized as the quintessential example of extreme sectoral distortion and excess.[vii] This milestone sparked widespread debate and numerous articles in the financial media, raising concerns that technology might once again be veering toward bubble territory. Yet, notably absent from these discussions was the fact that, without the GICS reclassifications of 2018 and 2023, the Technology sector would currently account for approximately 44% of the S&P 500.[viii] Furthermore, if prominent technology companies such as Amazon, Tesla, and Netflix were reclassified from the Consumer Discretionary and Communication Services sectors into Technology, the sector’s share would have already exceeded 50% of the S&P 500’s total composition.[ix] Using either metric, we already surpassed the 1999 tech bubble peak a long time ago.
This expanding dominance of the Technology sector over the broader market can be quantified by other means. Through regression analysis, we can assess the extent to which movements in the S&P 500 are driven by fluctuations in the Technology sector. From January 1, 2000, to December 31, 2010, 67.7% of the S&P 500’s weekly movements were attributable to changes in the Technology sector, with a correlation of 82.3% between the two. Since that period, the influence has grown significantly, with 83.9% of the S&P 500’s weekly changes now explained by the Technology sector, and the correlation has risen to 91.6%.[x] These figures reflect the GICS reclassifications of 2018 and 2023; without those adjustments, the statistical measures of Technology’s impact would likely be even more pronounced.
The practical implications of this analysis are evident: most investors are entirely unaware of the gradual increase in Technology’s weight within the S&P 500 and the efforts to obfuscate this distortion. Investors widely purchase the S&P 500, presuming it provides diversified, broad-based exposure encompassing the full breadth of the U.S. economy. In truth, they are unwittingly acquiring an investment that is nearly fully correlated with the Technology sector and increasingly isolated from other market areas. This effect is especially pronounced in long-term automatic investment accounts, such as 401(k)s and college savings plans, where individuals may have initially selected the S&P 500 for its intended diversification, only to end up with portfolios heavily skewed toward technology years later. Moreover, many have supplemented their core S&P 500 positions with direct investments in major technology companies or other growth assets to achieve further diversification. Over time, however, the volatility profile of these core holdings has increased as quantified by statistical measures standard deviation and beta over numerous timeframes, inadvertently narrowing their overall exposure to technology and heightening their risk. It is crucial to grasp that as the Technology sector expands, a greater portion of dollars invested in the S&P 500 is allocated to technology firms, fueling their outsized growth and further enlarging the sector’s share—a self-perpetuating cycle. Notably, the S&P 500 lacks any rebalancing mechanism, allowing this cycle to persist unchecked and potentially intensify over time without intervention.
To avoid misunderstanding, we acknowledge that economies and markets naturally evolve as dynamics shift. In 1990, the Industrials sector accounted for over 15% of the S&P 500, yet today it constitutes just over 8%—a clear reflection of changing times.[xi] Technology, undeniably, warrants a significant share of investable markets, and its prominence is both justified and welcome. However, the past decade has witnessed an unprecedented pace and magnitude of Technology’s dominance that is challenging to fully grasp. Investor awareness and engagement on this topic remain strikingly deficient, largely because it rarely captures headline attention. Rather than fostering greater transparency or implementing reforms to maintain balance in the world’s most critical index, the adjustments made have only obscured the issue, allowing it to intensify over time.
In his 1993 book, Beating the Street, renowned Fidelity Investment fund manager Peter Lynch advised, “You have to know what you own, and why you own it.”[xii] Today, it seems most investors in S&P 500-based investments may no longer have a clear grasp of their holdings given the dramatic shifts in its composition over the last seven years. Achieving true diversification has become increasingly challenging, requiring far greater effort and analysis than before. Simply purchasing a broad-based index or well-known fund no longer guarantees exposure to a wide range of sectors and industries. Investors must now be far more intentional to attain genuine diversification; otherwise, they risk holding a portfolio heavily concentrated in a single sector, often dominated by just a handful of companies.
Technology’s transformative influence on society is undeniable and merits its prominent role in the investment landscape. Yet, sectors such as consumer staples, utilities, energy, materials, and real estate—despite collectively comprising just 13.8% of the S&P 500—remain vital to the fabric of our daily lives.[xiii] If platforms like Facebook or YouTube were unavailable for a week, society would largely carry on, much as it did before their creation only two decades ago. In contrast, the loss of power, food, essential materials, or the buildings that house our homes and businesses would plunge us into chaos within hours. It would be preferable for investment markets to better reflect this fundamental reality and, in our opinion, Standard and Poor’s should take steps to address it.
For many, pursuing broader diversification may seem to imply lower returns, but this assumption does not always hold true. While the Technology sector garners significant media attention, numerous other asset classes and market segments have performed well in 2025 while also enhancing overall diversification. Year to date, the S&P 500 Technology sector has achieved a strong total return of 22.3%, yet it was outpaced by precious metals (represented by the Aberdeen Standard Physical Precious Metals Index) with a 50.3% gain and international developed equities’ (tracked by the FTSE Global ex US All Cap Index) 25.9% return. Other areas also registered similar gains such as emerging markets stocks (via the S&P Emerging BMI Total Return Index) which advanced 22.1%, broad commodities (measured by the SummerHaven Dynamic Commodity Index) which rose 18.9%, and global equities (represented by the MSCI All Country World Total Return Index) which increased 18.3% over the same period.[xiv] Notably, some of these market segments, spanning non-technology, non-domestic, and even non-equity assets, not only outperformed U.S. technology, but also introduced distinct return profiles, thereby fostering greater diversification.
Many investors may not realize that certain asset classes are outperforming the domestic technology sector, just as they may overlook the fact that their core S&P 500 holdings have become less diversified and increasingly growth-oriented over time. As technology continues its relentless expansion, claiming a larger share of major benchmarks like the S&P 500, investors’ portfolios become more dependent on the sustained success of this single sector.
However, the Law of Diminishing Returns—a well-established economic principle—suggests that as any entity scales, each incremental gain becomes smaller and harder to achieve. If the technology sector eventually faces the constraints of this principle, investors may find themselves scrambling to embrace diversification, potentially missing out on other promising opportunities in the process.
To avoid this reactive approach, we believe it is prudent to explore the benefits of diversification now, before a potential slowdown in technology’s dominance forces the issue. Proactive portfolio rebalancing can position investors to capitalize on a broader range of opportunities and mitigate risks tied to overreliance on a single sector.
As always, we hope you found this information valuable and insightful. If you have questions about your portfolio, the markets, or your financial plan, please do not hesitate to reach out.
Regards,
Peak Financial Management
Disclosures:
This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third-party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way whatsoever. This presentation may not be construed as investment, tax or legal advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and is subject to change without notice.
Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website, www.adviserinfo.sec.gov. Past performance is not a guarantee of future results.
[i] Bloomberg L.P. 2025
[ii] “S&P Dow Jones Indices and MSCI Announce Revisions to the Global Industry Classification Standard (GICS) Structure in 2018.” S&P Global, November 15, 2017, press.spglobal.com/2017-11-15-S-P-Dow-Jones-Indices-And-MSCI-Announce-Revisions-To-The-Global-Industry-Classification-Standard-GICS-R-Structure-In-2018. Press release.
[iii] “S&P Dow Jones indices GICS Select List – March 2023.” S&P Global, 30 June 2022, www.spglobal.com/spdji/en/documents/additional-material/20220630-spdji-gics-select-list-march-2023.xlsx. Microsoft Excel file.
[iv] “2018 to the GICS Framework: How Fidelity’s Sector Investing Options Will Reflect the Changes.” Fidelity Investments, Fidelity Investments, Sept. 2018, www.fidelity.com/bin-public/060_www_fidelity_com/documents/fidelity/GICS_Framework.pdf.
[v] Bloomberg L.P. 2025
[vi] Bloomberg L.P. 2025
[vii] Bloomberg L.P. 2025
[viii] Bloomberg L.P. 2025
[ix] Bloomberg L.P. 2025
[x] Bloomberg L.P. 2025
[xi] Bloomberg L.P. 2025
[xii] Peter Lynch and John Rothchild. Beating the Street. Simon & Schuster, 1993.
[xiii] Bloomberg L.P. 2025
[xiv] Bloomberg L.P. 2025