The strong recent outperformance of the technology sector (tech) has caused many investors to draw comparisons to the tech bubble of the late 1990s. As a result of these concerns, many investors have remained on the sidelines and have missed out on what we believe is a good long-term investment opportunity, supported by strong fundamental and secular trends.
Today, the technology sector is on much better footing than it was in the late 1990s. We illustrate this with the S&P 500 given technology is more robustly represented on the U.S. index versus the S&P/TSX. In March of 2000, at the peak of the "dot-com" bubble, the technology sector accounted for 34% of the S&P 500's total market value, but just less than 20% of its profit and was trading at 73 times last twelve month earnings. Today, by contrast, the technology sector represents 23% of the S&P 500's market value, but 24% of its earnings and trades at only 25 times last twelve month earnings. In other words, the market value of the tech sector today is supported by much stronger sector profitability and trades at a third of the valuation than it traded two decades ago. In addition, technology firms are in much better financial condition today, with high free cash flow generation and low debt levels, which have enhanced overall shareholder returns through rising dividends and share buybacks.
Historical Price-to-Earning Ratio of the S&P 500 Technology Sector
Given the limited number of Canadian technology companies, we recommend that Canadian clients looking for exposure to the technology sector should consider diversifying their portfolio with high-quality U.S. technology stocks.
We believe the sector outperformance can continue going forward, as numerous secular trends, such as cloud computing, mobile, artificial intelligence, autonomous driving, digital advertising and e-commerce should drive solid fundamental growth in the coming years. We recommend a 12% technology weighting for our client portfolios.
Past performance is not a guarantee of what will happen in the future. Investing in equities involves risks. The value of your shares will fluctuate and you may lose principal.