Key takeaways
Technology stocks continue to lead 2024’s bull market, but in mid-July suffered a pullback.
Stocks representing the artificial intelligence space have been among the market leaders dating back to early 2023.
Technology-oriented stocks remain on course to outpace the broader S&P 500 for the fifth time in the last six years.
A May-June surge in technology stocks drove record gains for the S&P 500 Index, a benchmark measure of large-cap stock performance. Tech stock momentum slowed in mid-July, with major technology issues declining. The setback has not yet altered tech’s position leading the S&P 500 this year, but its momentum appears to have slowed, at least temporarily. As was the case in 2023, the information technology and communications services sectors, year-to-date through mid-July 2024, continue to outperform all other S&P 500 sectors.1 Investors’ continued enthusiasm for companies well positioned to benefit from artificial intelligence (AI) advancements is driving sector gains.
“Investors have been excited by AI and for the most part, have put money to work in companies that play a part in producing AI capabilities,” says Rob Haworth senior investment strategy director at U.S. Bank Wealth Management. “What’s not clear yet is how companies investing in AI as a way to increase efficiencies or monetize services for end users will benefit from these advancements.”
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.”
“The key question is whether current lofty valuations for some tech stocks can be sustained by real revenue growth,” says Rob Haworth, senior investment strategy director for U.S. Bank Wealth Management.
Information technology stocks currently represent the largest sector of the benchmark S&P 500 Index, comprising more than 32% of the index’s value. When you add in communications services stocks, many of which connect with the technology arena, the group represents over 40% 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.
“It’s important as a signal for the economy overall that we see market leadership broaden beyond technology names,” notes Haworth. “However, it doesn’t mean that investors are ready to lower expectations for AI companies, which would primarily benefit the technology sector.”
Given their significant 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?
Technology stocks are prominent among what are considered the “mega-cap” stocks of the S&P 500. six of the top seven stocks in the index (Microsoft, Nvidia, Apple, Alphabet (2 classes), Meta Platforms) are in the information technology and communication services sectors. Those six listings alone represent more than one-fourth of the market capitalization of the S&P 500.3
But these prominent stocks only scratch the surface. Technology stocks represent a wide range of companies that cut across a variety of sectors within the broader stock market. New technologies and companies continually emerge.
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 has gained another 138% in value year-to-date through July 19, 2024.4
“Chip companies that are growing profits through strong order volume are, to this point, the biggest beneficiaries of the AI push,” says Haworth. “Nvidia’s fast-rising stock values can seem unrealistic, but they are backing them up with very positive earnings results and favorable forecasts for future earnings.” 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.”
Haworth says productivity growth is a key measure to watch in determining the effectiveness of AI implementation. Productivity measures the level of inputs required, including labor, to generate a certain amount of output. “In general, U.S. productivity trended lower after World War II, but since the onset of COVID-19 in 2020, we’ve seen some productivity improvement,” says Haworth. “If AI helps boost productivity, that will support not only corporate earnings and current rising stock valuations, but individual prosperity as well.”
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 lead the market. Tech stocks enjoyed a solid bump in May and June, but in July, the market began to broaden out to the benefit of other sectors. The Communication Services and Information Technology sectors declined more than 6% between July 10 and July 19 as investors rotated out and into mid-caps. However, Communication Services and Information Technology continue to outpace the broader S&P 500 year-to-date.1
“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 continue to be among the most profitable based on first quarter 2024 earnings reports.
Although the technology sector is always subject to short-term volatility, Sandven remains optimistic about the sector’s long-term potential. “If you look at what backs up this move in AI-associated stocks, it is continued corporate capital spending,” he says. “Companies are looking to get bigger, faster and stronger. They’re not doing that through hiring more people. They’re doing that through technology spending.”
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 health 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? Haworth notes, “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.”
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. Notably, in major mid-cap and small-cap stock indices, technology stocks are far less dominant, ranking as the 4th largest industry sector in both indices.5
“Over the long term, technology stocks can be expected to remain highly visible in the broader market,” says Sandven. He 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 technology stocks’ role in their portfolios.
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.
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 supported 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 and 2024’s first half, with interest rates still high, investors demonstrated greater interest in technology stocks, particularly among companies associated with emerging artificial intelligence (AI) advancements.
In 2024, technology stocks mostly managed to maintain the momentum generated during a spectacular 2023 performance. However, many technology-oriented stocks may carry fairly high valuations, and tech stocks experienced a rapid decline over a brief period in mid-July 2024. 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 maintain upside potential. Be sure to consult with your financial professional.
Up more than 60% from October 2022 through mid-July 2024, the S&P 500 flirted with a market correction in early August.
A fresh look at managing your cash and investments in today’s changing interest rate environment can help support your pursuit of the goals that matter most to you.
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