Is S&P 500 technology sector’s dominance dying?
By Dr. Niranjan Shastri
The S&P 500’s technology sector is losing its charm. A fall of more than 20% from the recent top was recorded. There is a slight recovery of about 5% from the lows largely driven by discrete events like a revival of a few M&A deals.
In the last decade technology sector played the role of a major force in driving the US stock market northwards and such an underperformance by this sector is worrisome for a large number of investors who put a bet on this sector. Some investors, haunted by the 2000 dot-com bust, are unable to rule out the possibilities of bigger and deeper cuts in prices of scripts of the technology sector.
In the decade just passed, investors believed that by choosing any top-quality incorporation from the technology sector, they have made their way for better and bigger portfolio returns. However, the past year has been a nightmare for such kind of investors who failed to understand that thematic investments are subject to roller coaster rides.
According to the reports of a top-notch investment banker, the technology sector contributes more than a quarter of the growth pie of entire US capital markets. Hence this recent fall has been a cause of concern not only for thematic investors but also for passive investors and their pie size is also shrinking proportionately.
Now many market analysts are agreeing to the view that the golden era for value investing may come back as the recent performance is showing that rather than dearer stocks from the technology sector, the performance of value-driven investments was far better. Well-established companies with strong fundamentals may attract investor attention and such kind of companies are rarely present in the tech sector.
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Fund managers are talking about this probable change in the market regime as a move from the so-called Growth Bucket to Value Bucket was evident in the recent past. Now, it is hard for any fund manager to carry with the conviction that growth will demonstrate clear outperformance in the decade to come.
One of the reasons of such underperformance of the technology sector may be that the best is over or in other words, the peak is made. Another argument by some expert advisors is that the premium at which few leading technology stocks are trading, is well above historical levels and this is a sign of an upcoming downtrend.
However, the question is whether this is a short-run situation or a long-term trend of the downfall of the technology sector? This dilemma is because of the unbeatable dominating positions of the big five US tech incorporations, one amongst them is the largest search engine, another one is the social networking giant, next one is not the biggest in volume but the biggest money maker in the cellular market, remaining two are largest online retailer and the best software provider respectively.
The best part of the growth story is that these five are having distinct business segments and they are not in any fight with each other. Even though some attempts are made by them to play in other’s areas but somehow such an initiative did not succeed.
In nutshell, their global mega largest scale of operations and no threat to each other are their big strengths. But do these two strengths provide them immunity against innovations outside? The answer is certainly NO.
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According to a few veteran investment bankers in case few companies succeed in creating a niche, these big fives will get big challenges and ultimately may lead to turmoil in the technology markets.
(Author is Associate Professor, School of Business Management, Indore Campus, NMIMS)
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