It was a year ago that the prospects of inflation and high interest rates in 2023 made many shy away from tech stocks, believing that high rates are negative for technology. Fast forward to end-2023 and technology has been the top performer. The relentless growth of digital transformation across most sectors of the economy cemented its presence with impressive and surprisingly accessible generative Artificial Intelligence applications. The most prominent example has been Chat GPT-4. Yet, since Open AI is not an investable company, we can use the example of NVIDIA which saw its AI dedicated chips sell at an unprecedented pace.
Sales of NVIDIA chips have skyrocketed due to Artificial Intelligence
Source: Investment Analytics, Financial Modelling Prep.
Most NVIDIA's AI chips were sold to Data Centers
Source: Investment Analytics, Financial Modelling Prep.
Why is technology so strong?
Technology can be applied to most sectors of the economy to cut costs, speed up processes, and improve products with little compromises. Not surprisingly, the sector has been the largest contributor to the market's performance by a large margin. Just the magnificent seven have contributed to half of the performance of the S&P 500.
The tech sector was the main contributor to market performance
Source: Investment Analytics, Financial Modelling Prep.
The magnificent 7 head the list of contributors to market performance
Source: Investment Analytics, Financial Modelling Prep.
Will the magnificent 7 continue to grow?
One of the biggest questions that many ask is: can these companies keep growing in the long run? The answer is YES; the whole world depends on them. The large tech names (Alphabet, Amazon, Meta, Microsoft, Apple, NVIDIA & others) provide the world's IT infrastructure necessary for the ongoing digital transformation. This process which started three decades ago, is expected to continue in the long run.
However, investors must be conscious of the valuation of these companies. Quality fast-growing companies can get expensive and it can be a long wait to find these on a bargain.
Are there investment opportunities left?
Probably. Plenty of opportunities lay beyond the large tech names. Companies that implement technology in their respective industries will likely gain a competitive edge over competitors and grow faster. Even more, you can find dozens of interesting tech companies in the main US stock market indexes. Some of them may not be large or popular enough to make headlines, but they can represent great investment opportunities.
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