The S&P 500 is Not the Economy A Wealth of Common Sense

Technology stocks make up nearly 24% of the S&P 500.
And that number is probably understating things since many of the biggest companies aren’t technically in the tech sector.

Amazon and Tesla are two of the biggest holdings in the consumer discretionary sector.
Facebook, Google and Netflix are in the communications sector.

Many of these companies are now such a part of our lives that it’s difficult to classify them in just one sector, but you could make the case that technology stocks actually make up more like one-third of the S&P 500.

We’re now seeing mass layoffs in these companies that are so embedded in our daily lives and such a big part of the stock market:

This seems like it has to be worrisome for the rest of the economy…right?
I suppose we could be looking at a canary in the coal mine situation where this is the first domino to fall but the tech industry isn’t nearly as important to the overall economy as it is to the stock market.

Goldman notes that even in the unlikely scenario where every single worker in internet publishing, broadcasting and web search were all laid off immediately, the unemployment rate would rise by less than 0.3%.

Part of this is because technology companies are more efficient. They don’t need as many employees as a steel mill.

But this mismatch also stems from the fact that the stock market is different than the economy in many ways.

shared a great chart this past week on that shows the difference in composition between the S&P 500 and the U.S. economy in the form of earnings and economic growth:
Sam notes, “The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.”

The stock market is mostly corporations that make and sell things.
The economy is mostly the stuff we do with those things.

Most of the time the stock market and the economy are moving in the same direction but they also diverge on occasion.

The S&P 500 also receives roughly  For technology stocks, that number is closer to 60%.
Profits for the broader economy continue to hit all-time highs

The same is true for the stock market this year:
Unfortunately, investors aren’t willing to pay as much for those profits this year because inflation and interest rates are higher.
Sometimes investors pay a high multiple of corporate profits and sometimes they pay a low multiple.