Technology is the most important industry for stocks today, indicating that blowout earnings from giants such as Microsoft could be good for the market.
Shares of Google parent Alphabet, Microsoft and Intel soared nearly 6 percent or more in Friday trading after reporting solid quarterly earnings that came in well above Wall Street’s expectations. The stocks are among the largest in the S&P 500 by market capitalization. In fact, the technology sector overall has the largest weighting in the index at 23.2 percent, according to a Sept. 29 fact sheet.
The high weighting and strong performance heading into earnings season have tied the S&P 500’s performance closely to that of technology stocks, especially over the last three months. During that time period, tech had the highest correlation to the S&P at 0.87, according to Kensho, a quantitative analytics tool used by hedge funds.
The closer a correlation is to 1, the more in sync two parts of the market are. The closer a correlation to zero, the more independent two parts of the market are. Telecommunications had the lowest correlation with the S&P over the last three months at 0.3.
“Frankly, it makes sense the correlation has risen here recently” between tech stocks and the S&P, said David Lebovitz, vice president and a global market strategist on the JPMorgan Asset Management Global Market Insights Strategy Team. “What you’re seeing here as breadth has narrowed over the last couple of weeks, investors have [bought stocks of companies] growing both revenue and earnings as people get a little skittish.”
The eight-year-old bull market is the second-longest in history, and many investors worry that a sharp drop in stocks is due soon. A bull market is a period without a drop of 20 percent or more in stocks from a recent high.
Lebovitz also pointed out that in a sluggish growth environment, stocks such as technology tend to perform better. The International Monetary Fund’s latest global growth outlook this month forecasts a modest rise of 3.6 percent this year.
The relationship between tech stocks and the S&P has not always been this close. Over the last six months, tech has tied with consumer discretionary for the highest correlation with the S&P at 0.82, according to Kensho.
Over the last two years, tech falls to third place behind industrials and consumer discretionary, the analysis showed.
However, consumer discretionary is almost a play on tech as well since e-commerce giant Amazon.com is the largest stock in the sector. Shares of the company leaped 11 percent to all-time highs Friday after reporting a quarterly earnings beat and strong sales growth in its cloud business, Amazon Web Services.
Big tech earnings aren’t over yet. Apple, which has the largest market capitalization in the S&P at $821 billion, is scheduled to report quarterly results on Nov. 2. Facebook, the fourth-largest S&P stock by market capitalization, is set to post results a day before.
Going back further into history, the S&P 500 is almost always up when tech stocks are up.
Since the current bull market began in March 2009, whenever the Technology Select Sector SPDR ETF (XLK) has gained more than 2 percent in a month, the S&P 500 has risen 96 percent of the time with an average return of 3.2 percent, according to Kensho.
On the other hand, the S&P has almost no chance of gains without tech stocks rising. When the tech ETF falls more than 2 percent in a month, the S&P falls 92 percent of the time with an average decline of nearly 3 percent, according to Kensho. The study looked at 37 such instances since the beginning of this bull market going back to 2009.
The S&P 500 traded Friday nearly half a percent higher within a quarter of a percent of its all-time high. The tech ETF rose more than 2 percent to a record high as technology stocks led S&P gains, while five sectors traded lower.
To be sure, some analysts worry that technology stocks are rising too quickly as investors chase performance. It’s not a healthy sign for the market if only technology-related stocks are rising. In 2015, only Amazon and Netflix doubled, while Alphabet and Facebook were up double digits. But the S&P 500 was barely changed on the year.
“As tech becomes a larger and larger component of the S&P 500, its contribution to risk is larger as well,” Lebovitz said.
— CNBC’s John Melloy contributed to this report.
Disclosure: CNBC’s parent NBCUniversal has a minority stake in Kensho.
