Tech Stocks as Career Obsolescence Insurance

Posted this poll this morning and the results came out just I had expected.

Is it at all possible that multiples are elevated for some segments of the stock market because people are investing based on metrics that have nothing to do with those prized by prior generations of investors? And, further, is it possible that these new investor predilections – for revenue growth and industry dominion and the capacity to disrupt a wide variety of industries and TAM (total addressable market) – is completely reasonable?

Target and Macy’s and Ford Motors and Best Buy did an admirable job chugging along at single-digit percent earnings growth rates for decades. And what was the point? Who benefitted? Why should investors prefer the shares of CVS and Walgreens and other sitting ducks who persist in this same strategy?

Identifying a company with a good profit margins and a nice earnings / dividend payout may have rewarded investors in the past. But identifying the companies that are going to eat all of the other companies and, by extension, someday be able to produce much higher earnings / dividend payouts might be the better route. The stock market seems to be voting this way.

The tech sector represents 23.5% of the S&P 500 as of the end of August. And just for context, this doesn’t even include the $80 billion value of Netflix or the $474 billion value of Amazon – both are classified as consumer discretionary. It also doesn’t include the $70 billion value of Tesla, which is not even in the S&P 500 despite being more valuable than 400 of the companies in the index.

Verizon and AT&T (worth a combined $440 billion) are not in the technology sector classification, but can anyone truly argue that they do anything but technology? That they aren’t, in fact, two of the most elementally important companies driving the entirety of the information technology revolution? What would Apple and Google be worth if not for the broadband and wireless connections being made by T and VZ everyday?

If we add this all up, isn’t it safe to say that technology is rapidly headed toward becoming a third of the S&P 500, and by extension, Corporate America? Why couldn’t this happen? The original Dow Jones was almost entirely comprised of rail roads. Up until 1999, there were only four sectors in the S&P – industrials, transports, financials and utilities. Everything had to be one of those four things. And then the committee changed it to ten. The economy has evolved and the index that purports to represent it has evolved as well. Over the last year, a whole new sector was born (the 11th) – S&P Dow Jones took the REITs out of the financial sector and gave them a sector of their very own.

At what level does technology get so big that it can’t all be held in one S&P grouping? More to the point, when does it get so big that it becomes indistinguishable from the US economy as a whole. Is every industry now a tech industry? Does every job become a tech job? Some would argue that this is already underway.

When US workers plow their retirement savings into the S&P 500, and in doing so they end up allocating more and more into the very technology companies that are rapidly displacing their jobs, perhaps they are doing something more than just investing.

Perhaps they are buying insurance.

Just thinking out loud. What do you think?

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