Technology stocks have been the surprise outperformers this year, fuelled by the excitement around AI and improving earnings.
- The Nasdaq is up over 30% for the year to date, compared to 2% for the Dow Jones Industrial average.
- Artificial intelligence has been the catalyst, with the excitement around ChatCPT drawing interest to the sector.
- This is the biggest performance gap between the Dow Jones and Nasdaq indices since the DotCom bubble.
It was supposed to be the end of the decade-long boom in technology stocks. Rising interest rates, higher inflation and a weaker demand environment should have stalled their progress, pushing investors to look more creatively for growth. Yet the technology sector continues to defy its critics.
The Nasdaq is up over 30% for the year to date. That puts it some way ahead of the S&P 500 (14%) and significantly ahead of Dow Jones Industrial average (2%). There have been astonishing individual stock performances. Nvidia’s rise of 186% in 2023 is perhaps unsurprising given the hype around artificial intelligence, but Tesla is up 136%, Meta is up 129%; even Alphabet is up 32%.
These companies are not quite at all-time highs, but some are flirting with levels not seen since the middle of the pandemic. This time, the excitement around ChatCPT has drawn interest to the sector and to the major cloud providers in particular. The magnitude of outperformance is also significant – MarketWatch analysis said this is the biggest gap between the Dow Jones and Nasdaq indices since the DotCom bubble.
The problem is that everyone knows how that ended. There is now a familiar refrain that the US markets looks very expensive, just as the economy is nudging towards a recession. Oxford Economists recently said that technology spending was becoming more closely sligned with GDP growth. That could be bad news if growth stalls.
There is another side of the argument: technology earnings have been far more promising this year, having re-set at the end of last year. First quarter revenue growth rates of 3-9% for Alphabet, Amazon, Meta and Microsoft at the end of April has helped boost confidence in the sector. At the same time, significant cost-cutting has buoyed financial performance. These companies have been far more resilient than many people thought.
Also, while it is difficult to prove, it feels like investors are still keen to buy technology. They haven’t shaken off the view that these companies can deliver them outsized returns and therefore every sign of weakness is a buying opportunity. It feels like it will take more than a brief wobble to reset investors’ expectations on the technology sector.
