U.S. cements itself as the global center of tech innovation

The U.S. technology sector’s vigor has built on 2023’s success in 2024 YTD. Last year, the Nasdaq delivered a total return of 45%¹ and 2024 quickly witnessed the tech-heavy index hit new highs bolstered by excitement around the tech sector, while the wider S&P 500 also reached a fresh peak.²

These market movements illustrate the industry’s growth rate, strength of earnings, and expectations of the potential of generative artificial intelligence (AI).

The so-called “magnificent seven” – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla – all of which have big stakes in the AI game, have garnered much of the attention as their respective share prices soared last year. In 2023, the S&P 500 delivered a 26% total return and the seven firms accounted for the majority of this.³

High earnings, high valuations

U.S. technology stock valuations have naturally risen on the back of the sector’s success. The price-to-earnings (P/E) ratio – a measure of a firm’s share price relative to its earnings per share – of the S&P 500 Information Technology (IT) sector is at 27.7, against 19.4 five years ago.¹

But while valuations are richer, relative to recent history – and relative to the wider S&P 500 average – they reflect expectations of higher earnings growth, driven by developments in AI and the sector’s ability to beat earnings forecasts.⁵

The sector’s latest set of earnings reports continue to highlight this. Alphabet – Google’s parent company – reported a better-than-expected 15% increase in first quarter (Q1) revenue to $80.5bn and announced its first dividend.⁶

Elsewhere, Microsoft beat expectations with a 17% increase in total revenue to $61.9bn in the first three months of 2024 as chief executive Satya Nadella hailed “a new era of AI transformation.”⁷

Cloud computing helped to deliver better-than-expected Q1 earnings for Amazon⁸  while Facebook owner Meta also beat forecasts, with a 27% rise in Q1 revenue.⁹

Future driver

While AI has been with us for some time – such as Amazon’s Alexa or Apple’s Siri – the arrival of generative AI, which can produce and create images, text, and videos, as well as a myriad of other kinds of content, has been viewed as a seismic game changer. History has shown us that technological advances have boosted productivity, reducing the need for labor in certain sectors, but simultaneously created jobs, often in new areas e.g., the shift from agriculture to manufacturing.

Generative AI’s economic impact could be as far-reaching as previous mass tech breakthroughs and it has the potential to increase productivity and growth.

Consultancy McKinsey & Company estimates that generative AI has the potential to add up to $4.4trn annually in economic value to the global economy as the technology could further automate activities that presently take up most of workers’ time.11 In our view, from an investment perspective, investors could find potential opportunities here.

Tellingly, 179 S&P 500 companies mentioned the term “AI” during their Q4 2023 earnings conference calls – the second-highest number since 2014 – while the highest was in Q2 2023, according to FactSet.¹⁰

Future driver

While AI has been with us for some time – such as Amazon’s Alexa or Apple’s Siri – the arrival of generative AI, which can produce and create images, text, and videos, as well as a myriad of other kinds of content, has been viewed as a seismic game changer. History has shown us that technological advances have boosted productivity, reducing the need for labor in certain sectors, but simultaneously created jobs, often in new areas e.g., the shift from agriculture to manufacturing.

Generative AI’s economic impact could be as far-reaching as previous mass tech breakthroughs and it has the potential to increase productivity and growth.

Consultancy McKinsey & Company estimates that generative AI has the potential to add up to $4.4trn annually in economic value to the global economy as the technology could further automate activities that presently take up most of workers’ time.¹⁰ In our view, from an investment perspective, investors could find potential opportunities here.

Tellingly, 179 S&P 500 companies mentioned the term “AI” during their Q4 2023 earnings conference calls – the second-highest number since 2014 – while the highest was in Q2 2023, according to FactSet.¹¹

Entrepreneurial ambition

Investors have taken notice of the U.S. tech sector for many reasons. For example, U.S. industrial policy is helping accelerate technological innovation there as legislative milestones such as the Infrastructure Investment and Jobs Act – known as the Bipartisan Infrastructure Law – and Inflation Reduction Act (IRA) highlight the government’s ambitions in terms of fortifying its domestic technology capabilities.

Additionally, the U.S.’s innate entrepreneurial spirit makes it uniquely positioned to drive and possibly benefit from the technology race. Following the bursting of the technology bubble at the turn of the century, many investors were left nursing some significant losses, but U.S. investors were unbowed and still sought out new opportunities.

Several of the tech companies that survived the period are among today’s giants, including Amazon, Microsoft, and Apple. Even going into and during the global financial crisis, many big U.S. tech companies continued to make acquisitions, taking a longer-term view that digitalization was an ever-increasing structural trend.

Beyond the “magnificent seven”

But beyond the U.S. tech behemoths, there is a wealth of innovative companies – and while they may not rise to the same scale as the giants – they boast strong business models setting them up for potential future growth.

California-based ServiceNow, for instance, has a cloud computing platform which helps firms manage digital workflows. It is a software-as-a-service (SaaS) operation which focuses on inward-facing parts of an organization, helping companies manage IT service requests and human resources processes. Some 85% of the Fortune 500 work with the firm which has seen its shares rise by more than 50% over the past year. ¹²

Electronic systems design specialist Cadence – another California native – provides software which enables users to design and simulate how a semiconductor or system works, before it goes into the costly production stage. The firm has seen its shares jump 38% over the past 12 months.¹³

In today’s economy, cybersecurity is a key growth area – especially as the damage caused by digital breaches is expected to hit $10.5trn annually by 2025 – a 300% increase from 2015 levels.¹⁴ It’s a market forecast to grow to $425bn by 2030 – up from $154bn in 2022.¹⁵

Again, the U.S. is home to numerous market leaders in the space including Palo Alto Networks which provides services ranging from vulnerability assessments to managed security services and even damage control consulting. The sector’s potential and the company’s foothold in the space has taken its shares up by 55% over the past year.¹⁶ Other U.S. leaders in the sector include cloud security company, Zscaler and Texas-based firm, Crowdstrike.

Future prospects

Given the level of digital transformation that multiple U.S. – and global – industries are going through and AI’s long-term potential, the outlook for the U.S. tech sector seems positive. Even so, we believe it’s unlikely to match its recent run without enduring a correction, and not all the U.S. giants have had a smooth run so far in 2024. There is much uncertainty still clouding markets – including over how AI is regulated, monetary policy, global geopolitical tensions, and the outcome of November’s U.S. presidential election.

But, fundamentally, we believe the U.S. technology sector – especially with the possibilities presented by AI’s advancement – could continue to offer investment opportunities down the line, especially as projections put it as the center point for technological innovation for years to come.

Companies shown are for illustrative purposes only. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute an offer to buy or sell any investments.

Risk Warning

Investment involves risk including the loss of capital.

The information has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. This analysis and conclusions are the expression of an opinion, based on available data at a specific date. Due to the subjective aspect of these analyses, the effective evolution of the economic variables and values of the financial markets could be significantly different for the projections, forecast, anticipations and hypothesis which are communicated in this material.