COMMUNICATION SERVICES: Highly Concentrated With GOOGLE & META

We continue to recommend a market-weight position in S&P 500 Communication Services, alongside our market-weight call on Information Technology, which we reiterated on April 25. The sector is a lopsided barbell. Alphabet and Meta together are the only two components of the sector's Interactive Media Services industry. Together, they account for almost 80% of the industry's market capitalization and 69% of its earnings (chart). The other 20% of the industry's market-cap share is a long list of advertising, broadcasting, cable, and telecom names that have largely underperformed. Any sector-level call is really a call on Alphabet and Meta.

So far this year, Alphabet is up, while Meta is flat (chart). The divergence sharpened during the Q1 earnings season. Both beat on the top and bottom lines. Alphabet rose 10.0% after reporting a big increase in cloud revenue. Meta fell 8.6% after raising capex guidance. As a result, JPMorgan downgraded the name to "rising AI spend without a clear monetization path." Same sector, same capex story, opposite reactions. The market is rewarding companies that are clearly already monetizing their AI investments.