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.
Bull market momentum for technology stocks slowed to a crawl in the third quarter. In fact, information technology and communication services sectors ranked ninth and tenth, respectively, out of eleven S&P 500 sectors. This contrasts with 2023 and the first half of this year when Tech stocks outpaced the broader S&P 500 by a wide margin.
“We’ve recently seen a rotation into stocks that benefit from lower interest rates,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “Declining interest rates benefited real estate, utilities, defensive stocks and smaller company stocks. This appears to be more a matter of sectors that were lagging the market catching up to large, technology stocks.”
“We’ve recently seen a rotation into stocks that benefit from lower interest rates,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management.
Growing interest in artificial intelligence (AI) applications appears to be the key factor underlying the tech sector’s growth. 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.
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.”
Information technology stocks currently represent the largest sector of the benchmark S&P 500 Index, comprising nearly 32% 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 500.3
After losing momentum in the third quarter relative to the broader S&P 500, investors may wonder whether tech stocks remain attractive. 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.4 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.”
Over four of the previous five years, technology stocks outpaced the broader stock market. 2022 was a notable exception. So far in 2024, technology stocks are again outperforming the broader S&P 500, although in the third quarter, the tech stock advantage faded as market leadership broadened to other sectors.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 AI is likely to play a critical role in boosting productivity, helping overcome labor shortages in select industries. “Tech stock valuations are on the high side, but they’ve been supported by actual earnings and expected revenue growth,” 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’ long-term direction. “The market won’t leave behind the technology and communications services sectors,” says Haworth. “They benefit the most from business capital spending today 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. In addition, factors such as increased regulation regarding AI and social media and potential antitrust action against the largest technology companies represent potential concerns that could affect business prospects.
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.
Through 2024’s first half, technology stocks mostly managed to maintain the momentum generated during its spectacular 2023 performance. However, many technology-oriented stocks carry high valuations, and tech stocks, in 2024’s third quarter, experienced modest declines. 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.
Having reached new record highs 46 times so far this year, investors wonder if S&P 500 stocks still have room to climb higher.
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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