Technology companies are set to maintain their dominance in the stock market, according to a note from Goldman Sachs (NYSE:GS) on Monday. The bank emphasized that factors such as emerging technologies like artificial intelligence (AI) and massive spending on research and development (R&D) will help solidify the sector's leadership position.
The tech sector has been leading the stock market since Apple (NASDAQ:AAPL) became the world's largest company about a decade ago. Despite the ever-changing landscape of the top companies and sectors represented in the S&P 500, Goldman Sachs predicts that the tech sector's lead is not likely to end in the near future.
Goldman Sachs provided three reasons why dominant tech companies may maintain their size in the current cycle longer than in previous technology cycles. Firstly, the bank noted that technology is deflationary, lowering prices for consumers and giving lawmakers no incentive to attack the sector from a pricing standpoint.
Secondly, technology is now considered a national security issue. Cybersecurity, chips, and increasingly AI are seen as critical parts of national infrastructure and strategic defense, especially amid rising geopolitical tensions worldwide.
Lastly, technology companies' ability to invest in themselves is a significant factor. Goldman Sachs pointed out that incumbent winners in the tech sector are so cash-generative that they can sustain this investment, strengthening their market 'moat' and potential future growth. According to Erik Brynjolfsson, over 60% of intangible digital investment comes from the top 10% of firms by market value.
The ratio of growth capital expenditure (capex), including R&D, as a share of operating cash flow is higher in technology than in any other sector. Tech giants like Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL), and Amazon (NASDAQ:AMZN) are spending more than $100 billion in capex, a large portion of which is allocated to cloud computing and AI. Generative AI is likely the fastest-growing category within this investment.
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