- Equity Strategist
United States, Intermediary
Change
The technology sector has been the darling of US equity markets — and by extension, the global economy — for some time now. In fact, for the past 10 years, a mega-cap slice of this market, the Magnificent 7,1 have dominated in terms of performance, turning in 36.72% annualized (compared to 11.41% for the broad S&P 500 Index, a proxy for the US equity market).
It may be hard to imagine a world in which these household names aren’t the center of equity outperformance but think back to the early days of the internet. In 2000, it was just as hard to imagine the most dominant global companies (Figure 1) going anywhere. Today, only one of 2000’s "winners" (Microsoft) remains a top performer.
Figure 1
Revisiting history serves a purpose; it reminds us how unknowable the future really is. Some of today’s biggest winners may not have such a massive footprint 10 years from now, even if they’ve been a name on everyone’s lips for the past decade or more.
This is true broadly, and within the tech sector specifically. Year to date, some of the Magnificent 7 are up, some are flat, some are down — the market may already be discerning tomorrow’s winners and losers. And look back at the top-10 companies from 2000. Social media sites like Facebook (now Meta) and technology like electric vehicles (think Tesla) were more like science fiction than reality. The next big name in tech might be something we can scarcely imagine.
In this vein, consider AI. This technology is so revolutionary it’s sparked investor euphoria that’s helped drive performance in the US and elsewhere this year. With how popular AI has gotten, and how much money has been poured into AI investment, it’s easy to forget that it’s very early days for this technology. In fact, the ubiquity of "AI" at work, online, at home, and in the news has some questioning whether we’re facing an AI bubble. I don’t think so. It bears reminding that AI isn’t a short-term trend, but a long and durable technological shift. So, it’s very possible those hard-to-imagine tech winners of tomorrow could be iterating on the nascent AI capabilities of today.
Investment implications
- Beware a linear mindset: Figure 1 reminds us we don’t know the future, so it’s a good idea to fight the notion of inertia from an investment perspective. Today’s winners might not be tomorrow’s.
- Observe companies emerging and evolving: Because tech has performed so well and transformed so much in recent years, there’s a huge capital spending ramp in this space. The rise of AI and the race to master it only intensify spending (and competition). Investors would do well to pay attention to who is doing what in tech broadly and with AI specifically.
- Consider an active approach: In my view, one of the best ways investors can put these first two implications in place is through an active approach. Active managers can typically get a closer look at research and development among tech incumbents and emerging companies than individual investors. They’re also able to operate with less regional bias. This is important moving forward because whether or not US exceptionalism is winding down, there’s no reason to believe the tech leaders of the future couldn’t exist elsewhere. And finally, while individual investors are wont to chase market bubbles, active managers can leverage deep wells of experience and expertise to discern companies with strong fundamentals, high quality, and truly innovative ideas.
1Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional or accredited investors only.
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