Key takeaways
Investors rotated away from technology stocks in the third quarter.
Real estate, utilities, defensive stocks and smaller company stocks outpaced technology.
Despite shifting capital market dynamics, technology-oriented stocks remain on course in 2024 to outpace the broader S&P 500 for the fifth time in the past six years.
Technology-oriented stocks are poised to finish 2024 with another stellar performance. Year-to-date through mid-December, the S&P 500 Communication Services and Information Technology index is up more than 40%, following 2023’s gain of 57%.1 Technology stock returns, which flattened in 2024’s third quarter, regained some momentum in the fourth quarter.
“Technology stocks continue to benefit from corporate investment in artificial intelligence (AI) applications,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “The pace of AI spending moderated a bit in the third quarter, but that had to happen, because it would have been difficult for corporate AI investment to maintain the same torrid pace of previous quarters.”
“Investors still see upside potential for technology stocks because much of the price growth is supported by actual earnings,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “It’s not just speculation that the future is going to be increasingly profitable.”
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.
Investors have long been drawn to the tech sector’s innovative nature. “Fast is getting faster, and speed, scale and efficiencies across the board don’t happen without technology,” notes Terry Sandven, chief equity strategist with U.S. Bank Asset Management. “To a large degree, technology is impacting all sectors of the economy in all walks of life.” Over the past decade, the Communications Services and Information Technology index, while experiencing some volatility, has regularly outperformed the broader S&P 500 index.1
“Technology companies offer the potential for strong earnings growth that’s not specifically connected to the business cycle,” says Haworth. “Most of the performance we see is driven by secular, rapid business growth.” Nvidia, the technology design company that has prospered most from today’s AI boom, is an example of a stock whose fortunes generally are not dependent on economic cycles.
Information technology stocks currently represent the largest sector of the benchmark S&P 500 Index, comprising more than 31% 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 40% of the S&P 500.2
Can tech stocks maintain the momentum of the past two years? How will conditions in the underlying economy affect the environment for these stocks?
Six of the top seven stocks in the S&P 500 index (Microsoft, Nvidia, Apple, Alphabet (2 classes), and Meta Platforms) are in the information technology and communication services sectors. Those six listings alone represent more than one-fourth of the S&P 500’s market capitalization.3 Many are connected to AI, and corporate AI spending remains significant.
“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,” says Haworth. “We’re in a consolidation phase to figure out what revenue growth will be going forward.” He adds, “If AI helps boost productivity, that will support not only corporate earnings and current rising stock valuations, but individual prosperity as well.”
The track record for tech stocks, particularly in recent years, is historically impressive. A hypothetical $100,000 invested in the S&P 500 Communications Services and Information Technology index on December 31, 2018 grew to a value of nearly $400,000 by mid-December 2024. That’s almost double the accumulated value of the same amount invested in the S&P 500 over the same period.
“The key question is whether current lofty valuations for some tech stocks can be sustained by real revenue growth,” says Haworth. He notes that AI is likely to play a critical role in boosting productivity, helping overcome labor shortages in select industries. “Investors still see upside potential for technology stocks because much of their price growth is supported by actual earnings. It’s not just speculation that the future is going to be increasingly profitable,” says Haworth. “Today’s environment is in contrast to previous historical periods where price bubbles developed, unsupported by underlying earnings.”
Although the technology sector is always subject to short-term volatility, Sandven remains optimistic about the sector’s long-term potential. “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 remains optimistic about technology stocks’ direction. “Technology stocks remain important to the market, especially for the long term,” says Haworth. “In today’s environment, technology stocks benefit the most from business capital spending and are at the core of our current economic expansion.” Nevertheless, he notes that investors need to be selective in their approach to this sector. While some technology startups achieve tremendous success, many firms fail to get off the ground.
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.
Except for a brief period of underperformance in 2024’s third quarter, technology stocks mostly managed to maintain the momentum generated during their spectacular 2023 performance. However, many technology-oriented stocks carry 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, technology stocks may continue to offer upside potential. Be sure to consult with your financial professional.
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