Is the dominance of the S&P 500 tech sector dying?

in Dr.Niranjan Shastri

The tech sector of the S&P 500 is losing its charm. It is down more than 20% from its recent high. A slight recovery of about 5% from the lows was mainly due to some discrete events such as a recovery in some M&A deals.

The tech sector, which has been a major force in driving U.S. stocks north over the past decade, has been so lagging that it worries investors who have bet heavily on the sector. Some investors caught up in the dot-com bust in 2000 couldn’t rule out a bigger, steeper price cut in the tech sector script.

In just the past decade, investors believed that by picking any of the top companies in the technology space, they had paved the way for better and greater portfolio returns. However, the past year has been a nightmare for the type of investors who don’t understand that thematic investing is a roller coaster.

According to a report by a top investment banker, the tech sector contributes more than a quarter of the overall U.S. capital market growth pie. As such, the recent decline is not only worrying thematic investors, but also passive investors, whose pie is also shrinking proportionately.

Many market analysts now agree that the golden age of value investing may be returning, as recent performance suggests that value-driven investing has fared much better than tech-sector stock prices have risen. Mature companies with strong fundamentals, something that rarely occurs in the tech industry, can grab investors’ attention.

For the latest news on the US stock market, click here.

Fund managers are talking about this possible change in market regimes, as the shift from the so-called growth bucket to the value bucket has been evident recently. Now, it’s hard for any fund manager to believe that the next decade of growth will show clear outperformance.

One of the reasons the tech sector is underperforming may be that the best of times are over, or in other words, the peak has come. Another argument from some expert advisers is that few leading tech stocks are trading at a premium that is much higher than their historical levels, a sign of an impending downtrend.

The question, however, is whether this is a short-term situation, or a longer-term trend in the tech sector lower? This predicament is due to the unrivaled dominance of the five largest U.S. tech companies, one the largest search engine, the other a social networking giant, and the next not the biggest, but the biggest money-maker in the cellular space. In the market, the remaining two are the largest online retailer and the best software provider respectively.

The best part of the growth story is that the five companies have different business units and don’t have any battles with each other. Although they made some attempts to make a difference in other areas, somehow, such a move didn’t work out.

In short, their global hyperscale operations, which do not threaten each other, are their big advantage. But do these two advantages shield them from outside innovation? The answer is definitely no.

Also read: Fed to hike rates by 75bps for fourth straight November

In the unlikely event that a handful of companies succeed in creating a niche, the Big Five will face a formidable challenge that could ultimately lead to turmoil in the tech market, several senior investment bankers said.

(The author is an associate professor at the School of Business Administration, NMIMS Indore Campus)

Source link