Tech Sector Dominance: Is there an End in Sight?

By David M. Haviland,  Beaumont Capital Management

I am sitting here at my desk on another nice sunny July day. With the weekend fast approaching, motivation can be difficult to come by. I’m sure many, specifically in the financial industry, can relate. I’ve always found that the best way to keep myself motivated is to have a little fun so I decided to switch things up from the normal chart blog today. While scrolling through charts, one in particular caught my eye. As the old saying goes “A picture is worth 1000 words,” and upon seeing this one, I realized I had a story to tell.

A little perspective before I get started: Due to the technology sector’s incredible growth it now makes up roughly 26% of the S&P 500® Index. When compared to the rest of the S&P 500, the technology sector’s growth and margin expansion have reigned supreme. You can see the margin expansion in the chart below and while it is simple enough it contains quite an interesting story behind the scenes. Let’s back up a bit.

The cutting-edge technology that dominated the market in the formative years of my career is now inexplicably referred to as “Old Tech”. Old Tech consisted primarily of the need for physical hardware (Intel, Cisco, Dell, etc.) and secondarily software (Microsoft, Adobe, etc.).   People and companies were buying desktops, laptops and servers. Routers and switches were needed to convey information primarily through internal networks.  I can even remember my Alma Mater’s mainframe computer taking up a whole floor of our library. This required physical space, people and systems to service it all. Old Tech was profitable and the growth was phenomenal.  The upgrade cycle (286 chip to 386 chip to 486 chip, etc.) was accelerating until the millennium. Then everything ground to a halt.