Technology is by far the best performing stock market sector so far this year – something that many observers have attributed to a handful of megastars, namely Facebook, Apple, Amazon, Netflix and Google (FAANGs).
The bad news is that some of the FAANGs are finding the going tougher of late for a number of reasons, including increased scrutiny from regulators, lofty investor expectations and saturated markets.
The good news is that the tech universe’s remarkable performance is more broad-based than many realise; it includes numerous companies with strong earnings and attractive growth potential.
Indeed, although the big stars have certainly contributed to overall tech gains this year, the rest of the sector has also done very well. True, the S&P 500 Information Technology index1 – where Apple alone accounts for 15 per cent and the top 10 constituents make up nearly two-thirds of the market capitalisation – gained 12.8 per cent in the first eight months of 2018. But its equally weighted version – where every stock has the same degree of influence – is up 12.3 per cent. If only a few stocks were rallying, we would not see that.
One reason for tech’s success, we believe, is that – unlike many other sectors – it has buyers in both the consumer and corporate markets, meaning it captures a lot of the economic dividend.
Technology companies are able to apply extensive operational leverage: they can leverage intellectual property without the need to significantly expand its fixed costs, like staff or premises. The agility of such low fixed cost business models means tech companies are able to be nimble, and pivot to the fast changing competitive environment. This is critical in the era of disruption. While the biggest companies in a sector can become more encumbered by regulatory burdens and spend much of their time addressing their relationships with society or government, the rest are left to focus on innovation.
If economic growth continues, tech should continue to benefit. And while the FAANGs are likely to remain in the news, the evidence shows that the benefits to sector extend much farther than the headlines suggest.
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