Before Tuesday’s tech sector declines, Apple on Monday became the first company to reach a market capitalization of more than USD 3 trillion. This quick rise underlines the high reliance of US stock returns on a handful of
mega-cap stocks. For 2021 overall, the top five contributors—Microsoft, Apple, Nvidia, Alphabet, and Tesla—accounted for 8.8 percentage points of the S&P 500’s total return. That compares to just under 4ppt going back to 1985.
The largest stocks in the S&P 500 (Apple, Microsoft, Alphabet, Amazon, and Tesla) now account for 23% of the index—a very high weighting relative to history. But while this heavy weighting means these stocks will have a big impact on overall index returns, we no longer see them as the best place to look for outsized returns in the tech sector. We expect more value to come from artificial intelligence, big data, and cybersecurity—the ABCs of tech.
1. Progress in artificial intelligence is increasing its applications for a range of businesses. In the near term, industry research firm Gartner believes narrow AI solutions will focus on three efforts: improving the customer experience; reducing the cost of products and services through efficiencies; and increasing revenue from new opportunities. We expect the broader AI market to grow by 20% a year to reach USD 90bn by 2025, implying an expansion of 2.5 times over the next five years. Growth could be even faster if AI improvements—in terms of computing power, machine learning, and deep-learning capabilities—are more rapid than expected.
2. More connected devices and rising internet adoption will drive opportunities for big data solution providers. We expect the global data universe to expand by a factor of more than 10 from 2020 to 2030, reaching 660 zettabytes—equivalent to 610 iPhones of 128GB capacity per person on the planet. Our outlook is mainly driven by rising internet adoption and data usage in large economies like China, India, and Indonesia. We are also seeing a proliferation of Internet of Things (IoT) connected devices, including refrigerators, cars, wind turbines, and public lighting. We expect the market for big data solutions that process this information to grow by 8% a year from 2020 to 2025.
3.Cybercrime is on the rise and will require greater spending to address it.
According to the 2021 Norton Cyber Safety Insights Report, nearly 330 million people in 10 countries have experienced cybercrime in the last 12 months, spending 2.7 billion hours dealing with the aftermath.
We expect the industry devoted to preventing such attacks to grow by an average 10% during 2020–25 thanks to steadily higher enterprise IT spending and the greater adoption of cloud security. Cybersecurity is also one of the most defensive segments within IT; spending on it has limited downside, as seen in 2020, due to its importance, and has continued to increase at a high-single-digit percentage rate in recent years, at a time when broader enterprise IT spending has risen by low- to mid-single-digit rates.
So, our “ABCs of tech” theme is driven by powerful secular trends around automation, analytics, and security—key strategic focus areas for many businesses. We expect this theme to generate 10% revenue growth over 2020–25 on average—higher than our estimate for the broader tech sector during this period (mid- to high-single-digit growth per year)—and earnings per share growth of 16% per year on average.