CIO breaks down 2023's drivers, highlights new areas of opportunity in 2024
On equity markets at least, tech was the defining story of 2023. The sector recovered from its 2022 losses led, largely, by the so-called magnificent seven: Apple, Microsoft, Tesla, Alphabet, Amazon, Meta, and Nvidia. Those seven companies grew over 100% last year and are beginning 2024 with a combined market capitalization greater than the total equities of Japan, France, China and the UK included in the MSCI All Country World Index. The emergence of generative AI tools drove a significant amount of growth for tech as investors became aware of the potentially groundbreaking productivity impacts this technology might have. Tech investors ended the year relatively happy.
Elliot Johnson believes tech will continue to play a defining role on equity markets this year. The Chief Investment Officer at Evolve ETFs thinks some trends from 2023 may hold true, while others will subside somewhat, nevertheless the technology sector should continue to be the focal point for investors seeking growth. Johnson detailed some of why he thinks tech will still lead, and the major themes and trends within tech that could define performance this year.
“I think tech is always probably going to be the investment theme of choice in a bull market, it’s where innovation happens,” Johnson says. “But I do think investors are now going to be considering whether they cycle out of being overweight magnificent seven into broader teach…I think we’re going to see continued broadening out because the thing that was constraining the market was interest rates, and we’ve got the signal from central banks that the pain and suffering is at least not going to get any worse.”
Johnson notes that tech’s broadening rally began late last year, as more names than the magnificent seven began to gain momentum. He expects some breadth to continue as smaller-cap tech names continue to catch up to the magnificent seven. He also expects bitcoin to be a major story as US bitcoin ETFs gain approvals. Bitcoin, he notes, was the best performing asset in 2023, following a rough four-year cycle with three years as a top performer and one year as a bottom performer.
Cybersecurity is another area Johnson thinks has room to run in 2024 because it is the most recession-resistant part of the tech sector. As consumers cut spending in a period of slow or negative economic growth, businesses and individuals will still largely keep their cybersecurity spends intact.
AI will continue to be a driver for the tech sector this year, in Johnson’s view. He calls AI “the sport of kings” because it is so capital and research intensive that the biggest steps forward have so far only been made by the largest and best-capitalized companies. That has, in part, explained the magnificent seven’s outperformance. Just because AI has been dominated by big players so far, Johnson thinks there’s opportunity for smaller players and the kind of disruptive garage startups that defined previous generations of innovation to get in on AI.
In the wake of what mega-caps have done with artificial intelligence, we’re starting to see smaller — often private — companies develop new forms of generative AI for more specific, targeted purposes. Johnson notes the example of one Canadian startup applying a generative AI to portfolio management, assisting PMs with the collection and analysis of key financial data.
After running so hot for so many years, many investors are put off by what they see as particularly expensive tech stocks — especially on the mega-cap end. Johnson pushes back on that premise somewhat, by positioning tech companies as long duration assets. Because a tech company’s value is often tied to the future application of technologies what may seem like high multiples now can be justified by the future earnings generated by innovation. The magnificent seven may be somewhat overpriced now, but the wider tech sector still has room to run. On a longer-term basis, Johnson notes that a lot of money has been lost by betting against big tech.
“We live in a world where the value of tech is concentrated,” Johnson says. “There have been so many times in my career where I heard very strong arguments with good reasoning behind them to say that big tech companies are overvalued, and then they went significantly higher from there. Calling that game is difficult, because next year Apple is going to release another iPhone and they will sell so many units, and generate more cash, because that’s what they do every year. Don’t fight that, just make sure your time horizon is appropriate for it.”
