Technology in our Sector Beat

Technology continues to dominate headlines and for good reason: the sector is experiencing somewhat of a renaissance. Developments in AI are hitting the market at an unprecedented cadence, with those companies most able to benefit from the AI revolution in the near term seeing actual and expected earnings rise along with stock multiples. Meanwhile, companies across sectors are seeking and promoting “tech enablement” — defined as the strategic integration and utilization of technology to enhance business processes, increase efficiency, and foster innovation.

However, we see a bifurcation within Technology between hardware and software providers. Hardware companies, particularly those in the Semiconductor industry, are weathering the effects of inventory destocking and normalization post the supply chain-induced pandemic spending spree, further compounded by headwinds in certain sub-sectors, such as automotive. On the other hand, many software and service providers continue to experience burgeoning interest from companies, Technology and otherwise, seeking efficiency improvements, AI integration, security enhancements, and digital solutions.

As such, executives across much of the sector are doubling down on the AI arms race and shifting resources and focus on R&D and productivity investments, including increasing automation within their own workforces. Tech companies large and small are reprioritizing efforts toward this megatrend and, as a result, we have seen a bevy of layoff announcements coming from this space as they “rightsize” some of the fervid workforce expansion undertaken during the pandemic.

The Big So What™? Despite near-term headwinds, the Technology sector continues to be among the most favored of all, reigning as the top bullish bet for four consecutive quarters according to our latest Inside The Buy-Side® Earnings Primer® published on January 11. And, while much has already been said about the hype behind AI and its influence on the sector, Q4 earnings was clearly a positive litmus test for the continuation of this theme, and guidance midpoints reflect overall growth in 2024.

Key Themes from Our Analysis

• Outlook: Industry Dynamics Split the Technology Sector in Two; Hardware Companies Expect an Inventory Digestion Hangover Through at Least the First Half of 2024, while Software is Anticipated to Pick Up Steam
• Demand: Despite “Near-term Headwinds”, Executives Tout Long-term Secular Growth Tied to Tech Enablement
• Expense Management: Companies Increase Investments in AI, Digital Transformation, and Productivity Tools while Shifting Resources Away from Other Categories… Including Headcount
• China: Despite Static Recovery, Long-term Optimism Persists
• Artificial Intelligence: From Digital Transformation to Cybersecurity, Product Enhancements to Analyst Workflow, Companies Embrace AI Technology with Open Arms and Expect Additional Demand Tailwinds as a Result