MW The tech sector hasn't been this top-heavy in decades. That could be an opportunity for investors hunting for bargains.

By Joseph Adinolfi

Software stocks are struggling while semiconductor names soar, creating a divergence within the high-flying tech sector

Microsoft's blowout revenue growth for Azure helped spark another rally in shares of so-called "hyperscalers."

The gulf between the U.S. stock market's winners and losers is growing wider by the day. Even the high-flying information-technology sector hasn't been immune.

On Monday, the ratio of the level of the equal-weighted S&P 500 tech-sector index to its capitalization-weighted sibling touched a multidecade low. Dow Jones Market Data put the ratio between the two indexes at 4.678 on Monday, the lowest reading since April 1999.

DOW JONES MARKET DATA

This means that the tech sector has become increasingly dependent on a handful of stocks for its continued good fortune.

To be sure, this is also true for the S&P 500 as a whole. Data from Goldman Sachs Group recently showed that the 10 largest stocks in the index accounted for roughly 40% of its entire market value, the highest share in decades. The tech sector currently enjoys the heaviest weighting among the S&P 500's 11 sectors.

All three of the most valuable companies in the index - Nvidia Corp. (NVDA), Microsoft Corp. $(MSFT)$ and Apple Inc. $(AAPL)$ - belong to tech. As of Monday, shares of these three companies accounted for nearly two-thirds of the sector's entire value.

"It is certainly getting top heavy," said Kevin Gordon, a senior investment strategist at Charles Schwab & Co. But just because tech is growing more concentrated doesn't mean investors should take a dim view of the sector.

Gordon pointed out that investors have been handsomely rewarded for sticking with what has already been working over the past couple of years.

As stocks have clawed their way back from the April selloff, the 10 best-performing U.S. mega-cap stocks have been responsible for about 80% of the S&P 500's gains, according to BofA Global Research's Michael Hartnett. Tech stocks accounted for the majority of these names, including Palantir Technologies Inc. (PLTR) and Nvidia.

Dan O'Regan, a managing director on the equity trading desk at Mizuho Securities USA, rattled off a few reasons for the growing divergence within tech during an interview with MarketWatch.

As investors have piled into shares of the expected winners from the AI craze, they have also dumped shares of the expected losers. This latter group has included many software names.

"For the past two months or so, this idea has been floating around that AI will do to software what Netflix $(NFLX)$ did to traditional media," O'Regan told MarketWatch.

The latest earnings season hasn't done much to discourage this. Microsoft Corp. (MSFT) reported blowout revenue growth for its Azure cloud-computing business segment, which helped spark another leg higher for shares of the so-called "hyperscalers."

The growing popularity of passive investment funds has also helped exacerbate this trend, O'Regan said. As investors continue to buy into passive index-tracking funds, they are inadvertently seeing much of their investment flow into shares of the biggest companies.

Dealmaking in Washington has created another tailwind.

Shares of Apple jumped last week after the company announced plans to invest $100 billion in the U.S. In exchange, Apple will avoid some planned tariffs on semiconductor imports. CEO Tim Cook even presented President Donald Trump with a gold-based plaque during his visit to the Oval Office.

Nvidia and other U.S.-based chipmakers also won an exemption from planned tariffs on semiconductors after Trump said he would exclude companies that had already committed to building in the U.S.

The president also announced on Monday a deal whereby Nvidia and Advanced Micro Devices Inc. $(AMD)$ would be allowed to sell certain chips in China, provided the U.S. government receives a cut of the sales.

Software companies have seen few, if any, of these benefits. According to O'Regan, Adobe Inc. $(ADBE)$ has become a poster child for the travails of the software industry. Salesforce Inc. (CRM) is another example of a tech stock with wide name recognition that has nevertheless seen its shares struggle this year.

See: AI is eating software, and Adobe is on the menu. Why the stock could be in trouble.

At the same time, semiconductor names have been going gangbusters. Nvidia and Broadcom Inc. $(AVGO)$ have continued to lead the way, while other names like AMD and Micron Technology Inc. $(MU)$ have joined the party since April.

Some might find the divergence between tech-sector haves and have-nots troubling. But according to O'Regan, it could be an opportunity for patient investors interested in scooping up shares of good companies at bargain prices.

"We don't really know where we are, we could be in the eighth inning, we could be in the third inning. But I know the pendulum usually swings too far to one side or the other," O'Regan said. "There will be massive buying opportunities for companies that have been thrown out with the digital bathwater."

The tech-heavy Nasdaq Composite COMP and the S&P 500 SPX both finished lower on Monday. The SP& 500's tech sector fell by 0.6%, making it the third-worst performer among the index's 11 sectors.

-Joseph Adinolfi

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

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August 11, 2025 17:18 ET (21:18 GMT)

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