Sector Changes in the S&P 500
Chart of the Week for May 30, 2008 - June 5, 2008
The S&P 500 Index is considered a proxy for the U.S. equities market. The companies that comprise the index are from different sectors and are weighted by their market capitalizations ("market cap"). Market cap is generally calculated by multiplying outstanding shares by market price. Hence the larger the company's market cap, the greater weighting or influence on the index. As specific companies or sectors of the market grow faster than the overall market, their weighting or influence on the index grows. Weighting can be measured as a percentage of the market capitalization of the entire index.
The chart above compares the change in weighting of the companies within the financials and energy sectors. The financials sector rose from around a 17% weighting in April of 2001 to a peak of almost 22% in April 2006. Due to the recent weakness in the financial sector, the weighting has dropped back near 17%. Conversely, the market cap of the energy sector companies has been increasing, resulting in the energy sector weighting almost doubling from April 2001 to April 2008.
The rise and fall of sectors is characteristic of the U.S. equities market as sectors move in and out of favor. The S&P 500 Index tries to model this movement with its market weighting. Investors should keep in mind that as market cap grows so does the influence of a specific company or sector on the market.
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