I think the technology sector is the most interesting sector because most of the top firms are in it and because it is driving earnings growth. We will look at some charts which show the direction of the sector. The chart below shows the secular upward trend in net margins. The sector has a few firms within it with monopolies such as AAPL with expensive phones, Facebook  FB with social media, and Alphabet with search. Since tech is the most profitable sector, it drives overall profit margins higher. Usually profit margins regress to the mean, but that might not be the case anymore if tech is able to keep this trend going. There will definitely be a ceiling which will be reached at some point, but that’s an issue we’ll see in the next five years. Obviously, margins will fall during recessions, but the question is whether they will rebound to higher peaks afterwards like we’ve seen in the past 20 years.

Technology is nearing 25% of the S&P 500. The characterization of the sector is confusing because it’s arguable that every sector uses technology. Wal-Mart, which is one of the biggest retailers in the world, bought Jet.com to get into online sales. Virtually every company has a website and social media presence. Most companies deploy some sort of artificial intelligence in their manufacturing processes. The line of what is and isn’t a technology company is blurred; it will only get more difficult to distinguish them as technology advances. Sector definitions are important because they determine multiples. That’s not to say that all tech firms get high multiples. Software companies get higher multiples than hardware firms. Besides valuations, sector determination effects ETFs which are quickly becoming drivers of equity prices.

The chart below shows the sectors which have had the largest representation in the S&P 500. As I said, the tech sector is nearing 25%. That is near the peak of the financials before the financial crisis, but it’s about 10% shy of the tech peak in the early 2000’s. Since 1990, when a sector gets above a 20% representation, it starts to underperform. This cycle appears to be different from the others because tech profits are diverse and more sustainable than in the 1990’s and financials in the 2000’s. That’s a subjective claim, but my reasoning is that there’s not one guiding theme that can change and bring the sector down. In the 1990’s, the internet was in its infancy. Companies back then didn’t reach the scale or importance of firms today. Their stocks were boosted on hype instead of earnings. Financials in the 2000’s were helped by the housing bubble.