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Why Large Tech Leadership is Likely to Survive

Updated: Oct 15, 2023

Large technology companies comprise almost 50% of the NASDAQ 100 index performance. They have large cash positions, growing earnings, and huge R&D Budgets. They are not going anywhere, but their growth rates are likely to slow due to their size. What happens when companies become too big to grow quickly? They buy up smaller companies to capture their higher growth rates for a while. And/or they eventually get broken up into smaller units. Alphabet's (Google's) growth strategy is a brilliant anticipation of this later eventuality. Rather than one great big company, they are already broken up into many less-large companies, which can maintain more of the entrepreneurial spirit.

However, AI advances may allow large companies to extend high growth rates longer than usual, which is why it is important for all portfolios to hold a large position in this sector. Alternatively, some regulatory break-ups, such as the one imposed on ATT in the 1980s, can result in higher growth, which happened with the "Baby Bells" after the ATT breakup.

In the short run, I believe the tech sector will grow in price more in step with the broader market because the rest of the stock market has yet to recover like the techs have this year. If not attractive, bonds and dividend-oriented stocks look less dangerous at current levels, much less dangerous.

Consider this. On January 1, 2020 (Pre-Pandemic), a 5-year Cdn Treasury bond yielded 1.462%. On Friday, October 13th, 2023, they closed at 4.203%. That is a 287% increase! Treasury rates have not been that high since January 2008. If the rates were to continue higher, the same series of rate hikes would have only 21% of the effect on bond prices. So buying or simply holding on to bonds and dividend stocks - their cousins, is a good idea at current levels.

The world is on fire, again. Climate change, armed conflict, and trade wars, there are so many things to worry about. But this is not new. Historically and practically, patience is rewarded in the long run and diversification will resume a stabilizing role between now and then. 2024 is a US election year, which usually bodes well for stocks. 2024 might be good for stocks and bonds as interest rates remain stable or waft down from their lofty current level.

(This blog post was edited with the help of Grammarly - an AI-based text editor! :)

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