What next if the technology rally loses steam?
By Garry White, Chief Investment Commentator at Charles Stanley
Shares in technology companies have led the charge this year. But, as a mixed set of second-quarter results emerges from the sector, how will this impact markets?
This year’s market gains have mostly been concentrated in the technology majors that have a high weighting in global indices. They have recovered from the sharp falls seen last year on hopes that the interest-rate cycle is about to turn and ridden a frenzied wave of artificial intelligence (AI) speculation on hopes the emergent technology will provide an earnings boon for the sector in the next few years.
However, results so far from the sector have been mixed, with a bias to the negative.
Alphabet bucked the trend, with its shares rising after its earnings report beat Wall Street expectations on almost all metrics. Google’s parent company reported revenue of $74.6bn, beating expectations for $72.75bn while reporting earnings per share of $1.44, more than the $1.32 expected by analysts. The company also reported another profit for its Google Cloud business, which first turned a profit in the first quarter of this year.
Microsoft shares fell as the company reported a slowdown in growth of parts of its business, despite the software giant beating Wall Street expectations with $56.2bn in revenue. The second-quarter figures showed slowing revenue growth for its cloud service Azure. Revenue from Azure only grew 26% in the fourth quarter of the year, compared with 27% in the previous quarter.
Netflix added more new subscribers than expected in the second quarter after the streaming giant clamped down on users sharing accounts. Netflix added 5.9 million new users, almost three times Wall Street’s expectations.
Tesla’s profit margin fell to its lowest level in four years in the second quarter, as the electric vehicle maker cut prices several times in major markets, including the US and China. Chief executive Elon Musk says it could continue to cut prices as the world economy is in “turbulent times”, sending its shares lower.
The table above demonstrates the recent dominance of the US technology majors in the MSCI World Equity index. All nine largest companies are American, and seven of them are technology based. Google-owner Alphabet appears twice in the top ten with its split capital structure.
If you turn instead to the MSCI All World index and include emerging market companies in the list, the one change is the exit of United Health from the top ten to be replaced by Taiwan Semiconductor Manufacturing Co (TSMC), the only non-US company but still a crucial part of the digital revolution as it is the world’s largest contract chipmaker.
Over the last century there have been sweeping changes in the companies and sectors that dominate. In 2000, the top ten was a more balanced portfolio, with oils, banks, retailers, industrials, pharmaceuticals, and telecoms all represented. The current sector and US dominance is unusual. In part it reflects a changed reality in how people lead their lives and spend their money, in part it reflects the market passion for the new and for growth, and in part the way some of life’s basics are in state or private ownership beyond the reach of quoted markets.
Today people do spend large sums on acquiring laptops, pads, smartphones and desktops, and businesses are reinforcing their spend on technology. More and more business is transacted through or by computer. Fast progress has been made in greatly enhancing capacity and quality in fibre optic broadband systems.
The future with the extra stardust of AI points to more of the same, with further expansions in the volume of digital based commerce, growing reliance of people and companies on digital methods and further technical and application breakthroughs. Banks want to replace branches with apps, retailers do more online, everything from training and learning to entertainment, house purchase and job search is increasingly shifting to an online answer.
Whilst the technology leaders dominate the top ten there are still substantial companies and sectors that cannot do everything on the web. There needs to be businesses growing and supplying food, offering gas, diesel and petrol for heating and transport, making vehicles, plant and equipment, producing products for home and office. The physical world has not been abolished, though the stock markets currently sideline it more.
History warns us that no sector or company dominance lasts for ever, and change is often swift. So far this year the combination of a big sell off last year in tech stocks after a great run combined with glimpsing new large possibilities from AI has returned sector shares to top form.
Maybe it is time to be looking at some of the other good stories out there that will lead to some other businesses and sectors doing well. The market has seen the trend to rearmament in an uncertain world and boosted the defence companies. Some retailers are now in their stride showing how they can use bricks and clicks to make good profits. When interest rates have peaked, property, cyclical industrials and other rate sensitive areas should do better.
As always, the prudent investor does not put all the bets on the current winning sectors and themes but has some spread for when the mood changes.
Uma Rajagopal has been managing the posting of content for multiple platforms since 2021, including Global Banking & Finance Review, Asset Digest, Biz Dispatch, Blockchain Tribune, Business Express, Brands Journal, Companies Digest, Economy Standard, Entrepreneur Tribune, Finance Digest, Fintech Herald, Global Islamic Finance Magazine, International Releases, Online World News, Luxury Adviser, Palmbay Herald, Startup Observer, Technology Dispatch, Trading Herald, and Wealth Tribune. Her role ensures that content is published accurately and efficiently across these diverse publications.