“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.
While some investors wonder if the technology stock rally may run out of steam, 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 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, “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. It’s reasonable to expect that technology stocks will play a role in any broadly diversified portfolio.
The future for technology stocks
“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.