The North American equity markets enjoyed a much-awaited uplift in the second quarter of this year, heavily influenced by a select number of (by broader definition) technology stocks.
The so-called ‘magnificent seven’ group of companies were particular benefactors over this period, with the highest performing of these seven companies being graphic processing unit (GPU) and chip producer Nvidia (+52.3%). Even the trailer of the group, Alphabet (parent company of Google), enjoyed an objectively impressive 15.4% return.
With the broader technology sector being so well favoured by the markets compared to other industries, the question of why the limelight focuses on this sector arises – is it simply trending on recent newsfeeds?
It would have been difficult to avoid the increasing hype around artificial intelligence (AI) in the past few months, with ChatGPT having broken its way into the modern vernacular the same way Google did two decades ago.
AI was once a niche concept thought to be the musings of science fiction, but now generates annual revenues in excess of £10 billion for the UK economy alone.1 There is plenty of potential in artificial intelligence – reviewing vast sums of data, draft-developing medicines in the healthcare sector and initial customer engagement are all areas in which it can be utilised.
The use of AI should, in theory, mean human labour can be rerouted to other areas, though this path may be met with some resistance. There was for instance a recent and severe public backlash when Suumit Shah, the CEO of e-commerce business Dukaan, revealed that 90% of the company’s customer support staff had been replaced by the AI chatbot Lina.2 Nonetheless, AI is an exciting development in the tech space, though one could quite justly ask if AI alone could buoy the US equity markets to the extent that they have been.
From that question, we can look at other areas of development that are equally as impactful. Google recently completed the production of its latest quantum supercomputer, which it claims can instantly process calculations that would take the systems of its rivals 47 years to finish.3 Tesla is looking to step into this space as well, with Elon Musk stating that the Dojo supercomputer it is working on will be imperative in the development of its self-driving cars.4 Meanwhile, Musk has to cautiously keep one eye on his other company, Twitter (recently rebranded to X), with Meta making a significant move into its customer base with the launch of its new social media app ‘Threads’.
These indicate not only a drive in technology in general, but also show that the commercial competition amongst these innovative companies is being propelled forward. Greater competition is good for commercial development and efficiency, which is in turn is good for consumers, and consequentially the economy.
It would not be outrageous to say that we are experiencing something of a technological revolution, as we did with the likes of IBM, Compaq and Dell in the 1990s, though this time with even further incentives for these companies to invest in research and development.
Society is ever more dependent and accepting of technology. Think about how often we use payment cards versus cash and navigate journeys using GPS. This reliance presents increasing opportunities for businesses in this space and a move towards sustainability will see concepts such as electrification and digitisation generate more demand.
Altogether, this suggests that the valuation resurgence in technology stocks is not completely unfounded, and paints an exciting future of what our more technologically-integrated societies might look like.
[2] https://www.bbc.co.uk/news/world-asia-india-66172234
[4] https://www.theverge.com/2023/7/19/23800854/tesla-driverless-dojo-supercomputers-production
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