Key insights
- The S&P 500 Information Technology Sector index experienced a statistically rare 'six-sigma' outperformance against the broader S&P 500 over a 50-day period, driven by strong gains in semiconductors and software. While this level of outperformance is unlikely to repeat, the article suggests tech stocks remain a viable investment, albeit with more moderate expectations. The recent pullback in tech from its highs indicates a potential normalization after an exceptional rally.
Tech stocks recently made a move that statistically should be extremely rare, according to the Carson Group. The S&P 500 Information Technology Sector index, which can be bought through the State Street Technology Select Sector SPDR ETF (XLK +2.93%), outperformed the S&P 500 index, which can be owned through exchange-traded funds (ETFs) like the Vanguard S&P 500 ETF (VOO +0.96%) -- by 29.7% over a 50-day trading period. That was six standard deviations above normal, making it what's called a "six-sigma" event. It's a statistical anomaly that mathematically should only happen once every 4 million years, although tends to happen more frequently in markets than normal distribution math suggests.
What makes this move even more extraordinary is that a large percentage of the S&P 500 already consists of large-cap tech stocks. About 35% of the broader index is in the tech sector, and its three top holdings are Nvidia (NVDA +2.34%), Apple, and Microsoft, which are the same top three holdings as those in the technology index.
Where the outperformance comes from is the tech index's 47% weighting toward semiconductor stocks, which has been a hot sector; its top ten holdings also included Micron Technology, AMD, Broadcom, and Intel. Over 22% of its portfolio also consists of software stocks, which, after being very beaten down, also saw a nice spring rally.
Given tech's performance, it's not surprising that the sector has more recently pulled back from its highs. The Technology Select Sector SPDR ETF is down about 8% from its highs, while the Vanguard S&P 500 ETF is about 3% off its highs.
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Tech stocks are still a great place to invest, just don't expect the same type of outperformance we saw this spring. That was likely a once-in-a-lifetime event.
However, despite all the talk of an artificial intelligence (AI) bubble, the valuations of many large-cap tech stocks are reasonable, if not downright cheap. Nvidia is a great example, as it trades at a forward price-to-earnings (P/E) ratio of just 16 times analyst estimates for fiscal 2028 (which ends in January 2028), while recently reporting 85% revenue growth in its first fiscal quarter of 2027. As long as AI infrastructure spending continues to hold up, which so far looks to be the case, then many of these stocks are likely to continue looking undervalued.
When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 923%* — a market-crushing outperformance compared to 207% for the S&P 500.
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That said, I still highly recommend using an S&P 500 tracking index ETF, like the one from Vanguard, as a core holding that you can consistently dollar-cost-average into. Invest $500 to $1,000 a month in the Vanguard S&P 500 ETF over the next 30 years, and you'll be well on your way to retiring a millionaire. You can then supplement that with investing in individual stocks, like Nvidia, to try to boost your overall returns.