Key takeaways
Technology stocks remain in a favorable position relative to other equities.
In fact, much of the stock market’s momentum can be attributed to a narrow group of technology-oriented companies.
The desire of many firms to enhance productivity through investments in artificial intelligence and cloud computing is providing a boost to tech stocks.
Investors continue to favor technology stocks in a trend that emerged last year and persists in the early months of 2024. Through mid-February, the S&P Communication Services and Information Technology index was up 9.26% year-to-date, compared to a gain of 5.64% for the broader S&P 500 index. This follows 2023’s results when the Communication Services and Information Technology index rose more than 57%, compared to a 26% gain for the overall market as measured by the S&P 500.1
“The fourth quarter of 2023 showed the markets broadening out, with significant gains generated by non-tech sectors of the market,” notes Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “In the early part of 2024, however, we’re back to where we were for most of 2023, with technology stocks outpacing the rest of the market.”
Investors have long been drawn to the market’s tech sector and the resulting innovations that often have a visible impact on society and capture the public’s imagination. “Fast is getting faster, and speed, scale and efficiencies across the board don’t happen without technology,” notes Terry Sandven, chief equity strategist at U.S. Bank Wealth Management. “To a large degree, technology is impacting all sectors of the economy in all walks of life.”
Information technology stocks currently represent the largest sector of the benchmark S&P 500 Index, comprising more than 29% of the index’s value. When you add in communications services stocks, many of which connect with the technology arena, the group represents more than 38% of the S&P 500.2 This means that individuals who invest in a broad stock market index likely already have significant exposure to technology stocks.
Given their most recent price gains, do tech stocks remain an attractive value for investors? How will conditions in the underlying economy affect the environment for these stocks?
An ever-evolving tech sector
A narrow group of “mega-cap” stocks recently attracted significant investor attention. These technology-oriented stocks are among the largest in the S&P 500 index. These include Alphabet (Google’s parent company), Amazon, Apple, Meta Platforms (Facebook’s parent), Microsoft and Nvidia. These stocks (along with Tesla) were responsible for 60% of the S&P 500’s strong performance for a 12-month period through January 22, 2024. They also represent 29% of the value of the market-capitalization weighted S&P 500.3
But these prominent stocks only scratch the surface. Technology stocks represent a broad range of companies that cut across a variety of sectors within the broader stock market. New technologies and companies continually emerge. “Today much of the opportunity appears to be tied to artificial intelligence (AI), machine-learning commerce, cloud computing, data analytics and data security services,” says Sandven.
Nvidia, a 30-year-old company that is heavily involved in the artificial intelligence arena, is a prime example of how the surge of excitement over the potential of AI can fuel investor enthusiasm. Over the course of 2023, Nvidia stock rose 239%, and started 2024 (through Feb. 15) with another 46% gain.4
“Tech companies are generating earnings, but valuations of many tech stocks have been driven higher based on earnings expectations,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “The question in 2024 is whether these companies can maintain a level of earnings growth that lives up to current stock prices.”
“AI offers the potential to lead to much more innovation and greater efficiencies,” says Haworth. He notes that most technology companies in the AI business are large, established firms that aren’t wholly reliant on success with AI to drive business results. “We don’t really see significant AI-only technology companies so far in today’s market,” says Haworth. “Successful AI launches can boost a company’s earnings, but not be the sole determining factor.” Nevertheless, Haworth says AI and cloud computing account for a significant portion of today’s corporate spending, as companies seek to enhance productivity and boost their bottom lines. “Equity markets are paying close attention to this trend, and companies that provide AI and cloud computing solutions are generating significant profits.”
How long can the tech stock surge persist?
For more than a decade (through 2021), stable economic growth, low inflation and low interest rates created a fertile environment for many growth stocks, including technology issues. Investors bid up prices of some stocks to very high multiples (a stock’s price-to-earnings ratio), far in excess of historic averages for some stocks. 2022’s bear market brought many technology valuations back down, but they again rose significantly in 2023.
“The key question is whether current lofty valuations for some tech stocks can be sustained by real revenue growth, says Haworth He notes that if technology stocks again lead the market in 2024, it may signal greater challenges for non-technology firms. “These tech companies need the firms that serve as their customers to also be in a strong financial position to invest in more technology,” says Haworth. He notes that technology companies were among the most profitable based on 4th quarter 2023 earnings reports.
Over four of the previous five years, technology stocks have outpaced the broader stock market. 2022 was a notable exception. So far in 2024, technology stocks again have the edge.
Haworth notes that some technology stocks stand out in today’s slow growth economy. “Markets have rewarded secular growth names that appear able to grow faster than the economy as a whole.” Haworth also believes that some of the largest technology companies are in a solid position to weather the storm of a higher interest rate environment. “Because of their healthy balance sheets, a number of these firms can self-fund growth and don’t need to issue bonds and deal with higher borrowing costs. They also hold large cash reserves, which can be safely invested and earn high interest rates.”
At current high valuation levels, are there inherent risks with technology stocks? “At this point, the situation doesn’t look like a repeat of the ‘dot-com’ bubble of 1999-2000,” says Haworth. “During that time, stock prices soared for many young companies with interesting prospects, but no real earnings. That resulted in a significant price decline when the bubble burst.” Today, says Haworth, “Tech companies are generating earnings, but valuations of many tech stocks have been driven higher based on earnings expectations. The question in 2024 is whether these companies can maintain a level of earnings growth that lives up to current stock prices.”
The future for technology stocks
“Over the long term, technology stocks can be expected to remain highly visible in the broader market.” Sandven believes that technology advancements will continue, which presents new opportunities for investors.
Haworth agrees that technology stocks have a bright future. “Innovations will continue to change the world and that will create investment potential,” says Haworth. Importantly, however, he notes that investors need to be selective in their approach to this sector of the market. While some technology startups achieve tremendous success, many firms fail to get off the ground. In addition, factors such as increased regulation regarding AI and social media is a potential concern on the horizon that could affect business prospects. Investors should be certain to weigh these factors as they consider the role of technology stocks in their portfolios.
Mutual funds and exchange-traded funds (ETF) that track a major index like the S&P 500 provide significant exposure to this high-profile segment of the broader market. Technology is even more prominent in the NASDAQ Composite Index. It’s reasonable to expect that technology stocks will play a role in any broadly diversified portfolio.
As you assess the most effective ways to position your portfolio consistent with your goals and time horizon, be sure to consult with your financial professional.
The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. It is an unmanaged index and direct investment in the index is not possible.
Frequently asked questions
Technology stocks represent companies that primarily engage in businesses relating to current and emerging technologies. They can range from computer hardware and software firms to internet companies to medical device companies, along with many other industries with technology at their core. Technology firms make up many of the largest stocks in today’s market.
For much of the 2010s through 2021, technology stocks appeared to benefit, in part, from a favorable environment featuring low interest rates and significant market liquidity. That benefited investments in growth stocks where investors focus less on current earnings and more on potential future earnings. In 2022, as inflation and interest rates moved higher, tech stocks suffered a significant correction, generally performing worse than the broad stock market. However, in 2023, with interest rates still high, investors demonstrated greater interest in technology stocks, particularly among companies associated with emerging artificial intelligence (AI) advancements.
As 2024 begins, a number of technology stocks that performed particularly well in 2023 may carry fairly high valuations. Investors should carefully assess whether a tech stock under consideration is considered “expensive” from a valuation perspective. Tech stocks may not necessarily offer the most attractive values in today’s market, but for companies that can continue to generate revenue and earnings growth, stocks may continue to have upside potential. Be sure to consult with your financial professional.
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