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Making Sense of the Upcoming S&P Sector Changes

Wells Fargo Investment Institute - September 2018

After market close on September 28, S&P will change its sector lineup. Scott Wren, Senior Global Equity Strategist with Wells Fargo Investment Institute, explains what companies will be moving into the new Communication Services sector— and what investors need to know about the upcoming changes.

Transcript: Making Sense of Upcomng S&P Sector Changes

Title graphic: Making sense of the upcoming S&P sector changes
After the stock market closes on September 28, Standard and Poor’s will reconfigure its current 11-sector lineup.
The Telecom Services sector will be eliminated and replaced by the new Communications Services sector. This sector will contain a number of social media and entertainment software companies from the Information Technology sector. The new sector will also absorb companies in the advertising, broadcasting, cable and satellite TV, movie, and publishing industries from the Consumer Discretionary sector. The remaining eight sectors will be left untouched.
Given these changes, the representation in terms of percentage of the S&P 500 Index’s total market capitalization will fall by a noticeable amount for the Information Technology and Consumer Discretionary sectors. The new Communication Services sector, based on recent pricing, will make up a touch more than 10% of the S&P’s total market cap.
Title graphic: What does this mean for the S&P Index?
Remember, the S&P 500 is a capitalization-weighted index. That means the higher the market capitalization of a company, the more influence its underlying stock price movements will have on the price of the index. The 35 largest-capitalization companies in the index are the companies whose price fluctuations typically drive their sectors’ index performance.
Of those 35 companies, seven will be leaving the Information Technology, Telecom Services, or Consumer Discretionary sector and migrating to the new Communication Services sector. Of interest to many investors, three of the five “FAANG” stocks are involved. Facebook, Netflix, and Alphabet (or Google) Class A and Class C shares will move.
The remaining FAANG issues, Amazon and Apple, will remain in their current spots in the Consumer Discretionary and Information Technology sectors, respectively.
What about the other mega-cap names that will be moving? Comcast Corp. and Walt Disney Co. will be moving to Communication Services from the Consumer Discretionary sector. In addition, telecom behemoths AT&T and Verizon Communications will be moved into this
newly formed sector as the Telecom Services sector is phased out.
Title graphic: Investor implications
In coming weeks, we will determine how the new sector configuration may affect our sector guidance recommendations. Currently, the Consumer Discretionary sector is rated favorable, the Telecommunications Services sector is rated unfavorable, and the
Information Technology sector is rated neutral within our five-tier guidance system. We will be dropping the guidance on Telecommunications Services and will be initiating guidance on the new Communication Services sector.
We will continue to update investors as new information becomes available from S&P in the coming weeks.

The mention of specific securities is not a recommendation or solicitation for any person to buy, sell, or hold any particular security.
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