INSIGHTS

On March 18, 2024

AAM Viewpoints — Be More Precise With Your Approach to Growth

As we near the end of the first quarter, growth stocks have continued on their momentum from last year, with the technology space yet again emerging as the leader. But as the runway for the sector is potentially reaching limits, particularly for the mega cap stocks, the list of prospects that will provide the next wave of growth may not be so easy to point out. Investors looking for further opportunities in technology may benefit from a more targeted approach by zooming in on specific portions within the sector that can offer market cap diversification and growth potential for the year ahead.

As markets are showing signs of a potential broadening out in performance contributors, note that there are over 6,000 public U.S equities within the Information Technology sector for investors to sort through. From a size perspective, the sector totals $22 trillion in market cap and is comprised of three industry groups: Software & Services, Technology Hardware & Equipment, and Semiconductors & Semiconductor Equipment. The industry groups make up $9 trillion, $6 trillion, and $8 trillion of the sector’s market cap, respectively, and may be a helpful guide in the search for areas with smaller market cap technology stocks.

Source: AAM, FactSet data| Past performance is not indicative of future results.

From a valuations perspective, the total U.S technology sector is currently trading at 42x by a P/E (price-to-earnings) ratio, making it multiples higher than the majority of the sectors. Looking underneath to the industry groups, the three currently trade at 55x, 46x, and 29x by P/E ratios, respectively. By comparing at the industry level, we can see how investors can better distinguish between the areas that have experienced significant expansion and those that potentially have room to grow relative to the broader sector.

Source: AAM, FactSet data| Past performance is not indicative of future results.

Industries are further broken down into sub-industry classifications, standing as another layer of insight investors can utilize to narrow down their approach. The sub-industries range from as small as $655 billion in total market cap for the Communications Equipment sub-industry to $6.8 trillion for the IT Services sub-industry. Furthermore, valuations across sub-industries can help uncover additional candidates for strong relative growth potential as well as recognize those that are well extended.

Source: AAM, FactSet data| Past performance is not indicative of future results.

By simply looking under the hood of sector exposures down into the industry and sub-industry levels, investors can have a clearer starting point to build their growth portfolio needs. With just this slightly more precise approach, investors can be better equipped to position into spaces that have the potential for continued growth even as outcomes at the sector levels may start to lose steam.

CRN: 2024-0311-11518 R