The Tech Sector: Maturing Fast but Losing Its FANGs
Today we conclude our series on the sectors of the stock market with a look at the Technology sector. While it may conjure up images of Silicon Valley startups, this diverse sector includes everything from electronics manufacturers to IT companies to software developers. It’s been a hugely significant sector in recent years: gains in tech have represented almost all of the S&P’s net growth in 2018. This rapid growth also means that the Tech sector commands P/E ratios that would be laughable in other sectors: growth is baked into the price. While stoking some fears of a bubble, this remarkable growth confirms how central this sector has become for the broader economy.
In fact, this sector has developed such outsized influence that it’s forcing a bit of a reorganization in the overall sectoral scheme. As detailed in yesterday’s blog, massive names from tech like Facebook, Netflix, and Google will be moved to the new Communication sector later this year (the other “FANG” stock, Amazon, is actually lumped in with retailers in the Consumer Discretionary sector). While losing its FANG’s may lessen the outsized influence of this sector, it will remain highly influential, and the shift may help investors focus on more purely technology-oriented stocks. And the slimmed-down tech sector won’t be bereft of big names, still featuring mega-cap titans like Microsoft, Apple
Since this sector features both largely consumer-facing firms (like computer retailers) and B2B focused entities like multi-service IT providers, its relationship to the broader business cycle is unusually complex. Consumer electronics spending would generally be expected to fade fast in the event of a recession. But much of business technology spending—like security, data storage, and basic IT services—is core to operations and unlikely to be highly elastic. Tech startups may be high-risk, high reward, but this rapidly maturing sector is becoming more and more integrated with the core productive structure of the economy.
The sector also features some more specific, industry-specific risks. Software, for instance, has the benefit of relatively low capital costs compared to huge potential returns. Software firms, however, are hugely dependent on IP law, a huge focus of political debate in recent years. Changes in IP via litigation or legislation can cause dramatic changes to business models overnight. Firms like Microsoft and Google routinely run afoul of anti-trust regulations, especially in the Euro-area. And we’re only beginning to see the political ramifications of the vast social influence now commanded by firms like Facebook. Trade conflict, meanwhile, has so far suggested that electronics manufacturers will be among the companies at greatest risk if protectionist sentiments continue to build. For now, however, investors appear to think these risks pale next to the massive potential rewards offered throughout the technology sector.
From profiting on headline-shaking news events generated by FANG stocks and released during extended hours trading, to making money on under the radar M&A moves, the Technology sector represents yet another fruitful target for news-based traders. If you’d like to learn more about using deep historical data and real-time news analytics to find market-beating profits, we recommend one of our complimentary virtual training seminars. We don’t put on a hard-sell, just take an up-close look at a platform that’s enabling smaller investors to rake data-driven profits from strategies that used to be relegated to Wall Street quants. You can claim a spot in our next available session using the button below: