Since the start of the early 2000s, technology has transitioned from a luxury product to a necessity.
The 21st century has witnessed companies that emerged during the tech bubble turning into core providers of many essential daily activities.
Seven out of the top 10 organisations by market cap are tech companies, highlighting the remarkable growth the overall tech space has seen over the past 20 years.
Making this even more impressive is the fact that January was the best start to the year for the tech industry since 2001.
More than 20 years on, tech companies are still able to attract investors, despite a relatively challenging macro environment.
While some might tie the recent performance to seasonality effects, other forces in play would also have played a crucial role in the record uptick.
We’ll focus on some of these reasons, including post-Covid China, shifting from innovation to efficiency and the emergence of artificial intelligence.
2022 was quite a challenging year from a business perspective.
Central banks around the world were left to deal with the aftermath of Covid-19 and stimulus programmes by increasing interest rates and inhibiting further economic growth.
This is highly relevant to tech stocks, which are seen as growth assets whose value depends on future cash-flow generation.
So once the outlook begins to worsen, prices directly reflect that.
On top of that, many tech companies deal with China somewhere along their supply chain. The second-largest economy in the world only managed to get out of the coronavirus loop around the end of last year when it eased zero-Covid policies.
Due to these restrictions, productivity has been largely affected, decreasing the already complicated operational capacities of tech companies.
As China enters its post-Covid stretch, significant value from supply chains will be directly unlocked, resulting in a more promising outlook.
One example could be Apple’s ties with production in China, which have reduced over the past few years.
When looking over the past couple of decades, the tech industry has been mainly known for its innovation and growth.
From the first iPhone to the rise of social media platforms and other digital services, such products are now well ingrained in our daily lives.
Much of the value of tech companies has been derived from their ability to provide offerings that have added a layer of simplicity or efficiency; others have been punished by their failure to adapt to cutting-edge technology (yes, we’re looking at you Blackberry and Nokia).
In the last months of 2022 and going into the early days of this year, tech companies have collectively shifted their strategy in light of lower earnings.
Instead of accelerating further innovation and technological advancements, these companies have resorted to cost-cutting.
Meta, Amazon and Alphabet have all initiated workforce reductions; while this might seem a colossal hit for such organisations, it actually provides an interesting insight into their way of work going forward.
The transition from releasing newer technology to increasing organisational efficiency highlights a possible change of mindset, which hovers around sustainable growth, regardless of short-term macro conditions.
This will definitely increase attractiveness for investors, whether retail or institutional.
Despite this shift towards efficiency, innovation still plays a fundamental role in creating value for tech companies.
One area that has witnessed notable growth is the emergence of AI platforms and tools.
Both services for retail users and add-ons and extensions for enterprise products are expected to add about $16 trillion to the global economy leading to 2030, according to a study by PwC.
Tech companies, as well as specialised firms, have been making efforts to position themselves to benefit from this growing market.
Alphabet’s recent AI slip has had massive implications on its stock price. This only shows the extent of anticipation and potential that such a product would present.
Focusing on the short term, there is no denying that the macro environment can most definitely affect the sector’s performance.
While the US Fed has returned to “normal” rate hikes, the number of such increases, as well as the stance that officials communicate will tilt the sentiment one way or the other.
As for the long term, the tech sector has shown glimpses of what it could further contribute, not only with regard to its own products, but also to most other sectors.
The recent tech rally might primarily be a result of a change of investor sentiment, but other developments are bound to support growth in the years ahead.
Mark Chahwan is co-founder and chief executive of wealth management platform Sarwa
