As Tech Stocks Rally, Risk Rises. Why Energy and Healthcare Could Be Options.

U.S. crude oil prices are down some 10% this year to $63 a barrel, but that may be near a bottom. Above, the Shearwater Platform, a joint venture of Shell and Exxon Mobil off the coast of Aberdeen, Scotland. (Courtesy Shell)

The S&P 500 index is turning into the S&P technology index, and that’s something investors need to consider—and worry about.

It may be time for them to look elsewhere to diversify their portfolios, and laggard healthcare and energy stocks look like good additions.

The S&P 500 continued its summer rally this past week, rising 1.2% and finishing at a new high of 6468.54. The benchmark has now returned over 10% this year and more than 30% from its April low.

Tech stocks— Nvidia, Microsoft, and Palantir Technologies —have powered the summer move, with the index’s tech sector now up 16.4% for the year. More recently, tech laggards such as Alphabet and Apple have revived, with Apple up more than 10% since the end of the second quarter to $232.

This past week, tech accounted for a record 34.5% of the index’s total market capitalization of $54 trillion. That’s up from 32% at the end of 2024 and 20% in 2018.

The current figure understates the true tech weighting because S&P Dow Jones Indices, which oversees the benchmark, categorizes Meta Platforms and Alphabet as communication services stocks. Add that pair to Amazon.com (classified as a consumer discretionary stock) and Tesla (an artificial-intelligence, robotics, and autonomous-driving play) and the “tech” sector weighting is about 45%.

This should matter to investors since the S&P 500 is the most popular benchmark for index and exchange-traded funds. There’s probably more than $10 trillion directly linked to the S&P 500 and trillions more from investors who deviate little from the index.

Tech dwarfs every other sector, and tech leaders are comparably sized to entire index sectors. Nvidia, the S&P 500’s top stock at 8% of its value, has a $4.5 trillion market cap, nearly equal to the entire healthcare sector at $4.7 trillion. Once-mighty energy has a $1.5 trillion market cap, 3% of the index.

America’s tech leaders are dominant, with lucrative business models and wide moats. But the recent rally has raised risks, with tech stocks trading at an average of 30 times forward earnings and 10 times sales.

Healthcare, energy, and financials are valued at closer to 15 times earnings. Ten times sales used to be viewed as an outlandish valuation, but Nvidia now trades for 20 times 2025 sales, and Palantir for almost 100 times.

Surging tech capital spending, much of it on AI, is undercutting one of the old arguments for tech investing—namely that strong competitive positions required only modest capital spending. Free cash flow is under pressure. Alphabet is projecting $85 billion of capex this year, up from $52 billion in 2024, and Meta sees about $70 billion in 2025, against $39 billion in 2024. Capex is now nearing 25% of revenue, double that of a decade ago.

“Tech industry capex is looking similar to the oil industry,” says Cole Smead, co-manager of the Smead Value fund. That probably means lower returns on investment.

One reason that many investors avoid energy is that high capex is needed to replace reserves. But all of the negatives in energy appear discounted in stock prices, with the sector—as measured by the Energy Select Sector SPDR ETF—about flat so far this year and many exploration-and-production companies down 10%.

Smead sees this as one of the best buying opportunities in energy in a decade. Conventional energy is needed to power AI, which the stocks don’t reflect. True, U.S. crude oil prices are down some 10% this year to $63 a barrel, but that may be near a bottom.

He favors cheaply valued E&P companies like Diamondback Energy, ConocoPhillips, Occidental Petroleum (a Warren Buffett favorite), and APA.

The big U.S. supermajors, Exxon Mobil and Chevron, are safer plays and trade for about 15 times forward earnings and yield about 4%. Their European counterparts BP and Shell are even cheaper. Probably the most depressed area in energy is services, including industry leader SLB —formerly Schlumberger—which is down almost 15% this year to $33 and trades for about 10 times earnings.

Energy is also a good hedge against inflation and higher interest rates.

Healthcare stocks started to stir this past week, rising 2%, but the sector is still down 3% this year. There’s concern about drug pricing, tariffs, and President Donald Trump’s top health official, Robert F. Kennedy Jr., who isn’t a big fan of the industry and traditional medicine.

But healthcare is as cheap as it has been relative to the market in 30 years, per Goldman Sachs research.

Two industry leaders, Eli Lilly and UnitedHealth Group, have depressed stocks and may have bottomed.

Lilly is dominant in diet drugs with injectables Zepbound and Mounjaro and is seeking to solidify that position with a diet pill known as orforglipron, which uses the same GLP-1 formula as the injectable drugs and could be on the market in the second half of 2026.

An effective pill could greatly expand the market. Yet Lilly shares fell 10% recently on what Wall Street viewed as mildly disappointing data about the weight loss achieved by participants in a key clinical trial for the new pill.

Lilly stock, now trading around $684, is down from a peak of nearly $1,000 last summer.

Lilly is a top choice of UBS analyst Trung Huynh. “Lilly is the clear leader in the space—it has the best drugs on the market,” he said this past week. It’s also a favorite of J.P. Morgan’s Chris Schott, who wrote recently that the stock was attractive valued at 27 and 20 times his 2025 and 2026 earnings estimates, respectively, considering that he sees “high teens” annual earnings-per-share growth into the early 2030s. Lilly insiders bought stock this past week, including CEO Dave Ricks.

UnitedHealth has been the worst stock in the Dow Jones Industrial Average this year, falling nearly 50%, to $271 at Thursday’s close, largely on earnings disappointments keyed to underpricing of health-insurance plans including Medicare Advantage. But after hours on Thursday, the stock was up about 8% after it was revealed that Berkshire Hathaway had purchased 5 million shares in the second quarter.

Bernstein analyst Lance Wilkes has laid out the bull case for health insurance, saying its woes were driven by higher usage of medical services that is starting to “decelerate back to normal.” He sees margins recovering in Medicare Advantage plans. And he’s bullish on UnitedHealth, now trading around 10 times his 2026 earnings estimate, and Elevance Health, formerly Anthem, now at some eight times 2026 profits.

Value investors like Dodge & Cox are accumulating UnitedHealth, while Elevance CEO Gail Boudreax recently bought $2.4 million worth of shares at $287, just below the current price of $295.

Write to Andrew Bary at andrew.bary@barrons.com