Technology Rules the Roost, But Where Have the Defensives Gone?

Jeff Buchbinder | Chief Equity Strategist

Last Updated: October 28, 2025

This bull market has been on quite a run. The S&P 500 is up 35% since its April 8, 2025 year-to-date low, and up over 92% since it began on October 12, 2022, excluding dividends (we wrote about the now three-year-old bull market in this LPL Research Weekly Market Commentary  two weeks ago).

The rally, led by technology stocks riding the artificial intelligence (AI) wave, has caused many market-watchers to question whether the stock market is in a bubble and if dotcom crash 2.0 might be coming. We don’t think so for several reasons. One is that spending is being done by such cash-rich companies with pre-existing business models generating massive cash flow.

Another thing that makes this cycle different from the late 1990s is that so little capital has gone into tangential businesses lacking a strong business case. Clearly, Pets.com, for example, didn’t have a strong enough business case to support its peak valuation, nor did so many other internet companies that came along and attracted so much capital after the infrastructure was built. This cycle surely has some AI infrastructure players with excessive valuations that won’t deliver great long-term returns, and some of the hundreds of billions being spent on AI will eventually prove wasteful in hindsight. But we would argue that the infrastructure phase carries less risk than the application phase, and the AI cycle probably has several more innings left before we get there.

One striking similarity between this market environment and the late 1990s is that the weight in the S&P 500 technology sector, illustrated in the “Tech Record Sector Weighting Echoes Late 1990s” chart, just eclipsed its record high level from 25 years ago. This suggests the tech sector is overvalued, which it may be at a 34% premium to the forward price-to-earnings (P/E) ratio of the S&P 500. But consider the sector traded at double the S&P 500 valuation in March of 2000 at the peak of the dotcom bubble.

Finally, given strong fundamentals, including a 20% earnings growth rate that could be maintained through 2026 as capital investment in AI continues to ramp, and the best earnings revisions of all 11 S&P sectors over the last three and six months, we don’t think technology’s run is necessarily over.

Technology Sector Weight in the S&P 500 Reaches All-Time High

Source: LPL Research, Bloomberg 10/27/25
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly.

Another related and striking similarity between this market and the dotcom era is the small weight in defensive sectors. As shown in the “Record Low Exposure to Defensive Sectors” chart, the defensive sector allocation in the S&P 500 has fallen to an all-time low of 16.6% (since S&P GICS sector classifications began in 1990). For defensives, we include consumer staples, healthcare, and utilities. The previous all-time low came in March 2000, at the peak of the dotcom bubble, when defensive sectors composed 17.1% of the S&P 500. The common thread here is the technology sector, which sucked all the air out of the room. Remarkably, the index weight in technology bottomed out in December 1992 at 5.1% before starting its epic run that kicked into a higher gear when the Netscape browser came along in 1994.

The takeaway here is not that technology is in a bubble (we do not think it is), but rather that the equity market’s built-in hedge to help mitigate volatility is unusually small. That means investors must look elsewhere, e.g., alternative investments, select high-quality REITs and master limited partnerships (MLPs), precious metals, or high-quality bonds, for defensive exposure to balance the volatility profiles of their portfolios. This also means more stocks are at risk of being hurt by cyclical weakness, something to consider when the next recession arrives — though that may not be for a while.

Record Low Exposure to Defensive Sectors

 Source: LPL Research, Bloomberg, 10/27/25
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.