Investor excitement about artificial intelligence (AI) has driven strong gains in US technology share prices over the last few years, although more recently the tech sector has experienced market turbulence.
Tech giants like Apple, Microsoft, Meta, Amazon, Alphabet, Nvidia and Tesla – often referred to as the ‘Magnificent Seven’ – have been the dominant force in the US stock market in recent years. However, we believe that spreading investments across a range of industries has greater potential to capture economic growth and gains in worker productivity1 in the years ahead.
Why should investors look beyond tech?
Our research suggests investors should avoid putting too much of their portfolio into the tech sector for three key reasons:
High valuations
Technology shares currently have very high valuations (a measure of how much investors are willing to pay for shares based on company earnings). This means much of their potential is already reflected in their prices.
Mixed performance
The tech sector doesn’t tend to outperform during periods of technological transformation. While we expect some future stars to emerge, there will be a larger percentage that fail. For example, during the dot-com bubble, for every successful company like Amazon, there were dozens of start-ups that didn’t survive.
AI’s influence will extend beyond tech
If our thesis on AI is correct, and it has significant positive economic outcomes, its influence will likely extend beyond the tech sector. Healthcare, finance and manufacturing could see significant benefits, driving overall economic growth and productivity.
Electricity was once a transformational technology and it influenced sectors of the economy well beyond energy itself. For that reason, if investors believe AI can create investment opportunities across several different sectors, one way to access these opportunities would be to increase exposure to shares generally, not to the tech sector specifically.
What should investors focus on?
We believe investors should pay less attention to headline-grabbing statements around a handful of companies, such as the Magnificent 7, or a particular sector, like tech.
Although large companies can have a lot of staying power, they rarely hold on to their position in the market or growth trajectory for more than a few decades. For example, the largest companies in the S&P 500 Index, which tracks the 500 largest US companies, are very different today than they were a few decades ago.
How do investors navigate this landscape? A simple but effective way is consider diversifying by owning shares across a whole range of industries.
Different companies inevitably fall in and out of favour, but by spreading your money across a variety of companies, you can potentially reap the benefits from those that are performing well, mitigating losses from those that aren’t.
1 Worker productivity is the output per worker or per hour worked.
Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
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