What Impact Will the Upcoming Sector Rebalancing Have?

by Michael Halloran March 13, 2023
As a result of their annual review of the Global Industry Classification Standard (GICS) structure, S&P Dow Jones and MSCI (providers of financial market indices) will be making several changes intended to better represent global equity markets for investors.

On March 17, they will dissolve the Data Processing & Outsourced Services group within the Information Technology (Tech) sector and reallocate its constituents to Financials and Industrials. Firms that provide services primarily related to payment processing will join the Financials sector under a new group entitled “Transaction & Payment Processing Services.” The reclassification will add several growth stocks to the traditional value stocks in Financials.

In total, about $950 billion of market capitalization representing 10% of the Tech sector will move to Financials. Financials will represent 14% of S&P 500 market cap (vs. 12% today). V, MA, and PYPL will be the three largest stocks affected.

Stocks that offer services focused on human-capital management will move to the Industrials sector. Within the S&P 500, this change affects three stocks representing less than 2% of the current Information Technology sector. The overall Industrial sector weight within the S&P 500 will remain about 9%.

The weight of the Tech sector will go from its current 27% to about 24% with the overall rebalancing.

The sensitivity of the new Financials sector to macro variables should not shift dramatically because of these changes. The legacy Financials sector shows a positive correlation with economic growth and bond yields. While the stocks entering the Financials sector from Tech are less cyclical and more growth oriented, the net impact on the macro sensitivity of the new Financials should be limited since these stocks will represent only 19% of the new Financials sector.

In addition to redistributing Tech stocks to Financials and Industrials, GICS will implement other minor changes. At the sector level, some Consumer Discretionary stocks will shift to the Staples sector. Within the S&P 500, the affected companies represent less than 5% of Consumer Discretionary market cap: Target ($76 billion market cap), Dollar General ($49 billion), and Dollar Tree ($33 billion). Within sectors such as Real Estate, Financials, and Industrials, GICS has announced definition updates and title changes.

The overall weighting within the S&P 500 Index for the Consumer Discretionary sector will remain at about 10% and Consumer Staples will remain at about 7%.

While the reclassification has implications for the sector tilts of mutual funds, we do not anticipate major trading anomalies considering this is a rebalancing rather than the addition or subtraction of stocks from the indices. Trading will also probably take place over time rather than on a single day.

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About the author

Michael Halloran

Equity Strategist

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