Key takeaways
Information technology stocks are the biggest contributor to first quarter S&P 500 gains of over 10%.
Stocks representing the artificial intelligence space, in particular, are among the market leaders.
Performance gains today, however, are broadening out beyond technology-related S&P 500 sectors.
First quarter 2024 stock market returns, in part, mimicked what occurred in 2023, with technology and communication services stocks among the leading sectors. In the first quarter the S&P 500 Communication Services index was up 15.82%, following its 56% 2023 gain. The S&P 500 Information Technology index rose 12.69% for the quarter on the heels of a 58% return the previous year. In the first quarter, both sectors outpaced the broader S&P 500, which rose 10.6%. The two sectors combined contributed nearly half of the S&P 500’s first quarter returns. Much of the enthusiasm for technology stocks seems to stem from growing anticipation of the impact of artificial intelligence (AI) applications. Stocks of companies on the leading edge of AI were among the biggest beneficiaries.
Performance from these two, technology-oriented sectors stood out in January and February. S&P 500 leadership rotated in March, with energy, utilities and materials stocks leading the markets in the quarter’s closing month.
“It’s important as a signal for the economy overall that we see market leadership broaden beyond technology names,” notes Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “However, it doesn’t mean that investors are ready to lower expectations for AI or companies involved in AI, which would primarily benefit the technology sector.”
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 close to 30% of the index’s value. When you add in communications services stocks, many of which connect with the technology arena, the group represents almost 39% 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 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. Four of the top five stocks in the index (Microsoft, Apple, Nvidia, Meta Platforms) are in the information technology and communication services sectors. Those four stocks alone represent one-fifth of the market capitalization of the 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.
“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.”
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 logged another 82.5% gain in 2024’s first quarter.4
“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.”
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.
“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.
While some investors wonder if the technology stock rally may run out of steam, Freedman remains optimistic about the sector’s potential. “If you look at what backs up this move in AI-associated stocks, it is continued corporate capital spending,” says Freedman. “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 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? Haworth notes that “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.”
Haworth says the current environment supports continued strength in the technology sector. “Many companies are looking to incorporate AI, but we also see software and service companies benefit from the push for productivity growth.” In addition, says Haworth, “Cloud computing and data centers are holding up because there’s seemingly no end to demand from potential customers.”
“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 technology stocks’ role 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.
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, with interest rates still high, investors demonstrated greater interest in technology stocks, particularly among companies associated with emerging artificial intelligence (AI) advancements.
With technology stocks generally off to a strong start in 2024 following spectacular 2023 performance, many 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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