The great neoclassical economist Alfred Marshall observed that firms were like trees in the forest: “Sooner or later, age tells on them all.” S&P 500 and DAX index revisions are now trying to review both the trees and the structure of the forest itself.


1. S&P 500 changes will result in more balanced sector sizes, but some worsening intra-sector concentration.

S&P Dow Jones and MSCI have decided to broaden and rename the Telecommunication Services equities sector as Communication Services. The changes will go into effect on September 28 and will be the biggest ever sector “refresh”. We think that there are three major takeaways here: first, that the S&P 500 sectors will be more balanced, although Technology will remain the largest sector; second, that three of the five so-called FAANG stocks will leave the technology sector, with Facebook, Netflix and Google moving to the new Communication Services sector; and, third, that the changes will result in both Technology and Consumer Discretionary sectors becoming more top-heavy, i.e. increasingly dominated by a few leading stocks. We consider the exact implications for sectors and possible investment implications on page 2.

 

2. Tech is also the main driver of changes to the DAX: technology stocks can now be part of the traditional indices.

Impending changes to the German DAX indices reflect a rather different approach to a similar problem. While the composition of the overall S&P 500 index will not change, that of blue-chip DAX index will, with a fintech replacing a traditional bank. But, in a lagging reflection of reality, the distinction between “Classic” and “Tech” will be abolished, so members of the TecDAX (technology stocks) index can also now be part of the MDAX (mid-caps) and SDAX (Small Caps) indices and the other way round. This removal of an increasingly difficult-to-justify distinction makes obvious sense, although one suspects that the latest revisions will not be the end of the story.

 

3. But concentration concerns remain for S&P 500 technology and consumer discretionary sectors.

The issue of market concentration, touched on above in relation to S&P 500 sectors, is a longstanding one. In fact, by the 1910 edition of his Principles of Economics, 20 years after the first-edition quote given above, Marshall was opining that very big companies “often stagnate, but do not readily die.” Stagnation is probably not an issue today, but very dominant firms do still enjoy many advantages noted by Marshall (and other economists) and there are growing concerns that this is having a structural impact on the global economy. As discussed at the recent Jackson Hole meeting, some believe that market concentration is leading to lower investment (and thus slow productivity growth) as well as a declining share for labor in national income. So the best economic ideas can still outlive the average tree.

 

To download a PDF of the full report, please click here.

 

 
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CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - Email: WM.CIO-Office@db.com