Overview
The Technology industry has a market cap of 1.42 Trillion USD. The S&P 500 is composed of top tech performers including MAG 7 stocks like Apple, Microsoft, and NVIDIA and emerging cybersecurity stocks like Palo Alto Networks and CrowdStrike Holdings. Unlike financials and healthcare that are heavily influenced by regulations and policy, this sector is not particularly sensitive to election outcomes.
Market Growth
As of August 20th, 2024 the tech sector is up over 31% year to day. UBS projects the S&P 500 year end results of 5,900 and an increase to 6,200 by June 2025.
The impact and evolution of artificial intelligence has contributed to higher than expected growth numbers across tech stocks. What investors believed were 2-3 revenue projections, quickly became reality within a 2-3 month horizon. The industry has constantly asked itself "what numbers could justify this growth?" and "are we experiencing a bubble similar to 2001?"
AI has been evolutionary rather than revolutionary, leading to capital expenditure efforts for both large and mid cap technology companies.
Key Components and Outlook
On August 5th, the Nikkei 225 of Japan, an index composed of high cap Japanese stocks, took a massive hit as the Bank of Japan decided to increase interest rates by 15 basis points causing investors of the popular Yen carry trade deciding it was time to exit. This 12% single day drop of the Nikkei in Japan reflected poorly as the US jobs report came out cooler than expected causing the S&P 500 to take its fair share of losses as-well.
A 3% single day drop in the S&P as a whole as well as 4% drop in the FANG+ index led investors to believe a recession was coming soon. Surprisingly, tech stocks bounced back better than expected and after 2 weeks recovered all its losses.
The strength of top performing technology companies was more than evident during the month of August, adding to the list of reasons why this era is unlike the dot com bubble.
Berkshire Hathaway liquidated a large chunk of its position in AAPL, nearly half of its stake, reducing its holding to $84.2 billion by the end of the second quarter. This sale has raised concerns around market valuation while others seem to believe this is just Warren Buffet cashing out of his long time, high growth, position in the stock.
Investor enthusiasm around the technology sector seems high but battled with fears of economic uncertainty. If earnings ever so slightly miss expectations, we could see sharp corrections like the one in early August. This has been represented by the VIX, an index measuring the volatility of the stock market, spiking to '01 and '08 levels just briefly during this past month.
We are experiencing a highly volatile environment, scary for those with holding growth stocks, highly levered companies, and retail investors who are quick to panic. On the other hand, hedge funds, option traders, and those invested in value and defensive sectors are thriving during these times.