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Tech Sector Leads Market Gains, While Telecoms Lags as Worst Performer in 2024

Last Updated June 23, 2024 11:12 AM
Giuseppe Ciccomascolo
Last Updated June 23, 2024 11:12 AM
Key Takeaways
  • The tech sector is a standout performer in 2024, significantly outpacing the overall market.
  • Key drivers include the AI boom, cloud computing, and cybersecurity.
  • On the other hand, the telecom sector is the worst performer in 2024 so far.
  • Is there still room for growth for tech stocks?

The tech sector has emerged as the star performer of 2024, propelling the Nasdaq to record highs while other major indices sputter. This outperformance is fueled by a confluence of factors, highlighting the tech industry’s resilience and potential for continued growth.

However, the telecom sector has faced a difficult first half of the year. Now, the market is looking for new investment options, and tech stocks still seem to be the best opportunity for investors.

Tech Performance Supported By AI Boom

The tech sector has been a standout performer in 2024, driving the Nasdaq to record highs despite broader market declines in the S&P 500 and Dow Jones Industrial Average. Several factors and trends are contributing to this outperformance, highlighting the tech sector’s resilience and growth potential.

Year-to-date performance statistics underscore the stark contrast between the tech sector and others. As of mid-2024, the tech sector has surged approximately 30% year-to-date, significantly outpacing the overall market. In comparison, the S&P 500 has seen a modest gain of about 15% YTD. Other sectors have not fared as well: healthcare is up by 3% YTD, financials are up by 10% YTD, energy has increased by 4% YTD, and consumer discretionary is up by 8% YTD.

Several key drivers are behind the tech sector’s surge. The ongoing boom in artificial intelligence (AI) has been a major factor. For instance, NVIDIA, a leading player in the AI and semiconductor space, has seen its stock price more than double YTD- up by 176% – due to robust demand for its GPUs, which are critical for AI applications.

Apple has also made headlines with announcements related to its advancements in AI, including new AI-powered features in its devices and potential new product lines leveraging AI. These developments have bolstered investor confidence, driving up Apple’s stock by 13% since the beginning of 2024.

In addition to AI, cloud computing and software have been significant growth areas. Microsoft continues to dominate the cloud computing market with its Azure platform, which has seen strong growth. Consequently, Microsoft‘s stock is up by 20% YTD, reflecting solid earnings and strategic investments in AI and cloud infrastructure. Similarly, Amazon’s AWS segment continues to perform well, contributing to the overall company’s growth and its stock price increase.

Cybersecurity And Other Positive Factors

Cybersecurity has also been a crucial driver. Companies like Palo Alto Networks and CrowdStrike have experienced notable stock price increases due to the rising demand for cybersecurity solutions amid increasing cyber threats. The semiconductor industry, beyond just NVIDIA, has also seen strong performances. Companies like AMD and Intel have benefited from the global chip shortage, underscoring their importance and driving their stock prices higher.

Several trends and announcements have further fueled the tech sector’s rise. There has been a significant push to integrate AI into various products and services across the sector, including AI-enhanced consumer electronics, enterprise solutions, and cloud services. Investments in sustainable technologies by major tech companies, attracting ESG-focused investors, have also played a role.

Apple and Google have made substantial commitments to carbon neutrality and renewable energy. Additionally, the rollout of 5G technology continues to drive growth for companies involved in telecommunications and related infrastructure, such as Qualcomm and Ericsson.

The tech sector’s remarkable year-to-date performance is a testament to its innovative capacity and ability to capitalize on emerging trends like AI, cloud computing, and cybersecurity. Investors remain bullish  on tech, anticipating continued growth and technological advancements that could drive further gains.

Telecom Sector Struggles

The telecom sector has been the worst performer in 2024, recording a steady decline year-to-date. Several factors have contributed to this poor performance, including market trends, consumer behavior shifts, and economic conditions.

Intense competition within the industry has squeezed profit margins, and market saturation in developed regions limits growth for traditional telecom services. Additionally, the heavy capital expenditures required for 5G infrastructure have strained financial resources, leading to increased debt levels and negatively impacting stock performance.

Consumer behavior shifts have adversely affected the telecom sector. The pandemic accelerated the adoption of remote work and digital communication tools, reducing reliance on traditional services. Consumers are increasingly preferring bundled services and value-added offerings, forcing telecom companies to innovate and diversify at significant cost.

Tlc market outlook
What will be the size of the telecom market? l Source: Technavio

High inflation and rising interest rates have increased the cost of borrowing, making it more expensive for telecom companies to finance their operations and investments. Economic uncertainty has led to cautious consumer spending, with many cutting back on non-essential telecom expenses. Additionally, global supply chain disruptions have slowed down the deployment of new technologies and services, further hampering growth.

These factors have collectively strained the financial performance of telecom companies, making the sector the worst performer year-to-date.

There’s Still Room For Tech Stocks

Denise Chisholm, Director of Quantitative Market Strategy at Fidelity Viewpoints, highlighted  earnings momentum as a key metric. For Chisholm, the recent uptick resembles a hockey stick, indicating strong positive momentum. This pattern is typically observed during economic recoveries, such as post-pandemic and post-2007-2009 bear market periods. Historically, such earnings recovery signals have been durable, leading to higher chances of continued earnings growth in the following years.

“Moreover, greater momentum usually correlates with stock advances and outperformance relative to the market. Currently, we observe top-quartile momentum, characterized by the steep rise of the hockey stick,” he said.

Forward earnings based on the average of analysts' published earnings estimates for the next 12 months
Forward earnings based on the average of analysts’ published earnings estimates for the next 12 months, weighted by company market capitalization. l Source: Fidelity

While the tech sector may have more room to grow, investors should balance this strong case for tech with some caveats.

One reason for bubble concerns is tech’s disproportionate performance compared to other sectors. By analyzing tech‘s performance relative to the S&P 500 and comparing it with other sectors, a persistent negative correlation emerges, meaning technology has been outperforming while other sectors, on average, have been underperforming.

Historically, this negative correlation signals a potential market broadening. Essentially, the market cannot be led solely by tech indefinitely.

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