Technology is transforming every other industry. The beneficiaries of this are often not the businesses deploying the new tech – they are the ones spending the money and may reap little reward for it – but the technology companies supplying them.
As a result, almost all the growth in operating earnings for the S&P 500 for the past eight years has come from the IT sector.
However, frenzied growth can lead to frenzied behaviour - something we often see among tech investors. The most obvious and exciting companies are always ludicrously overpriced in technology, and frequently have poor business models incapable of generating both profit and growth at the same time.
One need only turn to the WeWork IPO debacle - which saw the company's valuation drop from $47bn to $10bn in one month - to see how investor appetite for explosive top-line growth and market dominance results in mini-bubbles, which deflate viciously once realism begins to take hold and investors realise that the growth rate is the result of massive and unsustainable customer subsidy.
While WeWork and its cohort of loss-making unicorns including Uber, Lyft, Slack and Pinterest continue to hit the headlines, it is important not to confuse them with the technology sector as a whole, which has been experiencing strong, profitable growth for a decade.
Less glamorous companies that provide enabling technology offer reasonable valuations, as their earnings have been growing as fast as their stock prices.
One example of this is Texas Instruments, which makes power management integrated circuits. This might not sound overly exciting but, by giving electronic devices a longer battery life and enabling them to charge faster, this technology is being utilised across industry verticals.
This is no isolated case. It is fair to say technology as a whole now functions as an economic horizontal, its application determining success in every other sector.
As a result, technology is sucking all growth out of the rest of the market, with businesses forced to spend their excess returns keeping up with technology, rather than investing in their own growth.
And this is not stopping any time soon.
William de Gale is portfolio manager at BlueBox Asset Management
• Technology has become an economic horizontal, stealing the growth from other sectors
• Valuations remain reasonable for increasingly important, less glamorous tech stocks
• Loss-making unicorns with pumped-up valuations risk creating mini-bubbles
• Geopolitical instabilities and short-term disruptions to the global supply chain (e.g. coronavirus)