“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.”
After enjoying an extended period of outsized performance 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?
An evolving tech sector
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 500.4
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. Yet in today’s market, corporate AI spending is the biggest tech stock booster.
“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 Haworth. “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. Eventually, we will likely see AI spending plateau, because we can probably only build so much.”
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.”
Will tech stocks continue gaining?
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 are again outperforming the broader S&P 500. 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 retreated modestly in July and August, but still exhibit an edge over the broader market.1