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Changing of the Guard

Changing of the Guard refers to a ceremony during which soldiers or other officials guarding a major government building or state residence, especially Buckingham Place in England, are replaced by a new shift. It also means a group of individuals or organizations is replaced with another individuals or group.
(source Wikipedia). Last few weeks of market action has demonstrated that similar trend of "Changing  of the Guard" is gaining momentum in valuations of sectors and groups of companies. The trend is always there but gets momentum when major shift happens (like in dot.com era and recently has been expedited due to COVID pandemic). 

 "Sector" Changing of The Guard:
Looking at two market bottoms - March 2009 and March 2020 illustrate on how S&P sector weightage has changed just in 11 years.

 Mar 2009:

  1. Information Technology: 18%
  2. Healthcare: 15.1%
  3. Energy: 13%
  4. Consumer Staples: 12.8%
  5. Financials: 10.8%
Mar 2020:

  1. Information Technology: 30.3%
  2. Healthcare: 15.2%
  3. Financials: 13.8%
  • Consumer staples has fallen to #5 with 8.2% and Energy had fallen to #10 with only 2.4%
That means a single company like Microsoft is worth twice that of entire energy sector which includes some of the biggest companies like Exxon Mobil, Shell, Chevron and many other energy giants
And in last three months, the disparity in valuations had only grown.

While IT sector had been winner in last 20 years, there has been "Changing of the Guard" happening within the sector. Technology is all about innovation and disruption. The companies which have been most innovative in terms of disrupting the older model have been richly rewarded.

In just last few weeks, market cap of New Guard companies overtook Old Guard companies.
Here are some examples
  • Netflix is worth more than Disney, Comcast, AT&T and Verizon
  • Nvidia became most valuable semiconductor company overtaking Intel 
  • Salesforce overtook Oracle's market cap. Their rivalry is famous in tech industry
  • Tesla overtook Toyota as most valuable auto company on planet.
  • Paypal is worth almost same as Citibank and Wells Fargo Combined!
  • Amazon is worth 4 times of biggest retailer Walmart
There are many such examples. Only two companies from "Old Guard" have reinvented themselves dramatically to become part of New Guard - Apple and Microsoft. Even these companies were written off as old guard multiple times. It takes someone like Satya Nadella or Steve Jobs/Tim Cook to re-invigorate the innovation spirits and willing to bet the company in complete pivot for the future. 
Would some of the "Old Guard" companies repeat the Apple/Microsoft story by disrupting their own businesses and reinventing themselves. Walmart and Disney had shown initial success with their online and streaming businesses. 

What about sectors?
In 20th century, Oil was the blood of the Economy!
In 21st century, Software and Data is the blood of Economy!
And this shows up in the S&P sector valuations. Top 5 most valuable companies in S&P has are from IT and command nearly 20% weightage.

The "Changing of the Guard" is continuous process. In 2030 maybe some of the old guard would become new guard and today's crop of new guard would be disrupted by old guard or New New Guard!

Next week would be start of earnings season with earnings from banks, Netflix and United Healthcare. It would be harbinger for rest of earnings season. So get ready for roller coaster ride for next few weeks!

/Shyam

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