The annual rebalance of the S&P Dow Jones Indices (SPDJI) range saw a big rotation of energy stocks into its growth indices following a bumper year of returns for the sector.
Energy was the stand-out performer of 2022, with the S&P 500 Energy sector returning 66% last year, meaning it now has the largest sector weighting in the S&P 500 Pure Growth index at 30.5% following the December rebalance, up from just 6.1% a year earlier.
Meanwhile, energy has fallen from 10.4% to 4.6% in the S&P Pure Value index, while tech more than doubled from 3.9% to 8.4%.
SPDJI’s ‘pure’ indices range is weighted by style score versus the float market capitalisation of the S&P growth and value indices.
However, the energy sector also makes up 8% of the market-cap weighted S&P 500 Growth index, up from 1.4% before the rebalance, its largest upward reweighting since 2009.
Hamish Preston, director of US equity indices at SPDJI, said: “While the 8% weighting is not unprecedented – energy accounted for 12% of the index in 2011 – the magnitude of the change is unusual.
“Energy was one of two S&P 500 sectors to gain last year, utilities being the other, while on the other end of the spectrum communication services, consumer discretionary and tech are all down by 30% or so.”
It is end of year rebalance season and we noticed interesting changes afoot in growth/value benchmarks, particularly the S&P family. Value indexes dramatically cut weight to the cheapest sector (energy), and put Energy stocks into the growth indexes. What happened? 🧵
— Jeremy Schwartz (@JeremyDSchwartz)
The sharp swing can in part be attributed to the momentum factor accounting for a third of the SPDJI’s growth factor definition, alongside three-year sales per share growth and a three-year ratio of earnings per share change to price per share.
Sekar Indran, senior portfolio manager for equities, at Titan Asset Management, said the energy’s rise was also boosted by strong earnings and revenue growth rates following several supply-side shocks last year.
“The momentum effect had a large impact given the 12-month price move,” he said. “Additionally, the energy sector experienced a massive boost to its earnings and revenue growth rates from supply-side shocks and the subsequent rally in oil prices.”
Despite this, energy remains one of the cheapest sectors on aggregate, with no other sector recording a lower price-to-earnings multiple.
“Much of the energy sector for example still trades on cheap multiples based on price-to-earnings and free cashflow yield so they understandably would be surprised to see such a large allocation within a growth index,” he added.
It comes as value indices vastly outshone their growth counterparts over 2022, and while energy was the standout performer, other defensive sector plays including utilities, consumer staples and healthcare also saw their weights cut in the S&P Pure Value index following strong outperformance.
Utilities fell by 4.7%, while consumer staples and healthcare dropped by 2.6% and 4%, respectively.
Meanwhile, concerns about overvalued growth sectors weighed on markets with sectors such as communication services and information technology down 40% and 28% over 2022.
As a result, information technology has seen its weight cut by almost two-thirds in the S&P Pure Growth index following the rebalance, from 35.6% to 12.9%.
The huge swing between the value and growth indices highlights how important it is for investors to understand the methodologies behind the index construction.
Indran added: “While we do not have any exposure to these particular indices, we always must be aware of index rebalances occurring in any of the investments we hold and the impact they could have at a portfolio level.”