- Technology companies are poised to dominate the stock market, according to Goldman Sachs.
- The bank highlighted that emerging technologies like AI should help solidify the sector's dominance.
- Helping reinforce the tech lead is their massive spending on research and development.
The technology sector has dominated the stock market since Apple became the biggest company in the world about a decade ago, and the dominance should continue.
That's according to a Monday note from Goldman Sachs, which outlined that while the top companies and sectors represented in the S&P 500 are always changing, there's good reason to expect that the tech sector's lead isn't going to end anytime soon.
"None of the 10 largest companies in the S&P 500 in 1985 were still in the top 10 in 2020, and only one from the list in 2000 remained in the top 10 in 2020," Goldman Sachs said. "Nevertheless, we see three reasons why dominant tech companies may stay bigger for longer in the current cycle than we might have seen in historical technology cycles."
1. The tech sector is deflationary.
According to Goldman, technology lowers prices for consumers, giving lawmakers no incentive to attack the sector from that angle.
"In this way the tech sector from a policy perspective may be different from others, such as banks, supermarkets or energy companies, where politicians often argue that the benefits (for example of higher interest rates for savers, or lower food and energy prices) are not being passed on to consumers. This does not make technology companies immune from regulation, but it is more likely to come from issues around privacy and use of data, or the impact on mental health, than on pricing."
2. Technology is a national security issue.
"Technology, including cyber security, chips and increasingly AI, are seen as a critical part of national infrastructure and strategic defence. This has become more important as geopolitical tensions rise across the world."
3. Technology companies invest in themselves.
"Given that the current incumbent winners are so cash-generative, they have an ability to maintain this investment, strengthening their market 'moat' and also potential future growth. According to Erik Brynjolfsson, the top 10% of firms by market value account for over 60% of this intangible digital investment," Goldman Sachs said.
"The ratio of growth capex (both capex and R&D) as a share of operating cash flow is higher in technology than in any other sector. Microsoft, Alphabet, and Amazon are spending more than $100bn in capex, of which a large portion is on cloud computing and AI, with generative AI likely comprising the fastest-growing category."