Although tech stocks were getting plenty of attention before the emergence of Covid-19, “the pandemic and associated lockdowns have changed the calculus,” according to a recent article in CFA Institute.
“Billions of us now use technology and telecommunications to communicate, work, learn, shop, entertain ourselves, and consult with our health care providers more than ever before,” the article reports, adding, “PC sales have increased, consumers and enterprises have moved to the cloud, and even our parents and grandparents can now give Zoom training lessons.”
The article quotes Microsoft CEO Satya Nadella, who said, “We have seen two years’ worth of digital transformation in two months.”
The article outlines several factors to consider in determining the impact of the tech sector going forward including the following:
Sector weightings as of YE 2020: At the close of 2020, IT companies made up 28% of the S&P 500. “There you have it,” the article quips, “the answer to the question of how important tech is: CEOs should spend just over a quarter of their time thinking about the sector. But wait — tech is actually even bigger than that!”
Tech Stocks in Hiding: The two largest stocks in the S&P 500 (by market cap) are the tech companies Apple and Microsoft, but while others in the top ten are classified as a mix of Consumer Discretionary and Communications Services, they include Amazon, Facebook Tesla and Alphabet/Google—all of which could also be considered tech stocks.
The article adds that the eighth largest stock—Berkshire Hathaway–is in the financial sector, but since Berkshire owns more than a billion shares of Apple among other tech stocks which collectively account for almost half of Berkshire’s holdings.
Tech businesses continue to emerge: “There were 480 initial public offerings (IPOs) in 2020, more than double the number in 2019. Most were for tech companies, and the larger tech IPOs from the class of 2020 have a combined market capitalization of $460 billion.”
While the article notes that the tech sector is currently experiencing a tailwind, it suggests that instead of considering tech “as just another sector,” investors might want to view it as a new asset class: “Given its lack of correlation with other stocks during the two latest financial crises and its multi-decade expansion as a share of the market, tech clearly is the sector to watch.”
The article concludes by highlighting the following three takeaways:
- Tech will not be less important as we emerge from the pandemic.
- “C-suites and boards need to spend more time thinking about technology, how it is changing, and investing in it.”
- “The smartest companies will dedicate more resources to technology than everything else put together.”