Technology had a bad 2022, but it's still the biggest part of the S&P

 

At the end of 2022, Info Tech represented 26% of S&P 500 equity capitalization, and remains the largest sector of the S&P. This is driven by trillion dollar companies like Apple and Microsoft.

How does this look in historical context? At the height of the Tech Bubble, Info Tech represented 33% of S&P 500 equity capitalization before collapsing to 13%. 

Tech has certainly come along way in terms of profitable growth over the last 20 years. At the peak of the Tech Bubble, Info Tech never generated more than 14% of the S&P 500’s earnings. The profit contribution from Info Tech has increased over the past few years and the sector now accounts for 21% of S&P 500 net income.

So, somewhere between 21 and 26% makes sense in 2023. This profit contribution reflects the maturity of this age of digital technology. It also makes it more attractive for non-tech companies to copy, and could lead to a more balanced S&P over time. For example, while amazon led the charge on ecommerce, it now makes both strategic and financial sense for other retailers to embrace multi-channel commerce. Media companies are now embracing streaming and social media channels, beyond the legacy broadcast and cable.

So, where do we go from here? Perhaps pure play technology companies can find a new burst of growth through technologies that now seem to be approaching scale, such as the cloud, AI and even blockchain. This would help them continue to grow revenue and earnings at a faster clip than everyone else.

Or, perhaps non-tech companies can now embrace fully the more mature technologies of the internet, payments and commerce to improve their own profitable growth, pulling more relative valuation to themselves.

The impact of covid suggested at first that technology companies were pulling even further ahead, but this view was dashed in 2022. At this stage on the technology cycle, it seems that we can no longer generalize tech vs non tech and need to be more selective of individual tech and non-tech companies to be be the ones to sustain their financial advantage.