Commentary: We're All Tech Investors Now

Three cheers for Cisco Systems. Let's whoop it up for Microsoft. Go Intel, go Sun, go Dell. If you're invested in the U.S. stock market at all, you had better join the cheering section for the entire technology sector. Even if you don't own a single tech share because you believe the stocks are overpriced, pray for tech. Your financial future depends on what happens to those stocks.

We're all tech investors now. At the end of the third quarter, the 65 technology stocks in the Standard & Poor's 500-stock index accounted for a shade under 25% of the index' market capitalization, compared with 19% in December and a mere 7% in 1992. (chart).

If you are one of the millions of investors who have sunk some $750 billion into S&P index funds, either directly or through a 401(k) plan, one out of every four of your dollars is now in tech stocks.

BULGING SECTOR. Technology stocks surged from 21% to 25% during the third quarter. That's because tech made gains of 4.4% while other sectors lost ground. If not for tech stocks, notes portfolio strategist Leah Modigliani of Morgan Stanley Dean Witter, the S&P would have been down 9% during the quarter and down 1% year to date. With tech's contribution, the quarterly loss was 6.6%, and 1999 performance remained positive at 5.3%.

This tech bulge is not just a quirk of the S&P. The Russell 1000, a broader large-cap index, is 21.5% tech, too. And just about any U.S. diversified mutual fund that's making tracks these days is fueled by tech stocks as well.

One explanation for most funds' sluggish results is that they haven't invested enough in technology. "If tech is 25% of the market and you're underweighted in tech, it will take extraordinary stock picking to beat the S&P," says Thomas D. Stevens, chief investment officer for Wilshire Asset Management.

There is a downside to the market's dependence on tech stocks. They are more volatile, and contribute to sharp swings in the market that unnerve investors. Moreover, while tech companies account for one-quarter of the market cap, they contribute only 12.6% of operating earnings. So if one big tech player disappoints at profit time, the bad news reverberates over a large swath of the market. After the market closed on Oct. 12, Intel reported profits came in a few cents per share shy of expectations. That helped send the S&P down 2.1% the next day.

History shows any one sector cannot maintain its dominance forever. Energy peaked at 30% of the S&P in 1980, and it's now 6.3%. And consumer staples jumped to over 20% in the early 1990s, but they're only half of that today.

Commentary: We're All Tech Investors Now

Still, there's a powerful case to be made that tech will rule for years. Investment strategist Jeffrey M. Applegate of Lehman Brothers urges clients to overweight technology in their funds because the companies are the principal beneficiaries of a powerful macroeconomic trend: the substitution of capital for labor. Driven by the falling cost of technology, capital-goods prices are declining at a 4% annual rate while labor costs are increasing by 3%. Says Applegate: "If these aren't the growth stocks of our era, I don't know what are."

And whether or not you invest in these companies, it's hard to imagine that the 75% of the market that's not technology would remain healthy if these stocks got sick. Let's go, tech.