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Tech: Big trends to watch

Key takeaways

  • While the past year was undoubtedly challenging for tech, I still see plenty of powerful trends to drive potential value for investors.
  • Cloud computing, artificial intelligence, and the growth of the 5G wireless network may have created long-term opportunities in the sector.

After the so-called "tech wreck" of 2022, some investors may be wondering if the information technology sector's best days are now behind it.

But look beyond the challenging headlines that some companies have faced of late, and one can find powerful long-term themes creating potential value for investors—like the shift to hybrid work and continued adoption of cloud computing. And after recent price drops, some opportunities may even be found to invest in these themes at attractive valuations.

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A challenging past year

Before digging into the sector's recent history, it may be useful to explain what's included in the information technology sector and what isn't. The sector is predominantly composed of companies that make and sell technology software and services. It does not, however, include companies that are popularly thought of as tech companies but that primarily earn revenue from digital advertising, like Alphabet and Meta (which are instead part of the communication services sector).

Chart shows 2022 year-to-date performance for the information technology sector and for the S&P 500.  As of December 9, information technology sector stocks had lost 24.12% at the index level, compared with the S&P 500's 16.17% loss year-to-date on a total return basis.
Past performance is no guarantee of future results. Technology sector performance is represented by the S&P Technology Select Sector index. Data as of Dec. 9, 2022. Source: S&P Dow Jones Indices, a division of S&P Global.

Those notable exclusions may help to explain why the sector's performance in the past year—though still lagging the S&P 500®—wasn't worse at the aggregate level.

The sector did, however, suffer from the same challenges as the broad market, including investor anxiety related to high inflation and rising interest rates. And with consumers and businesses increasingly worrying about growing recession risk, some buyers reduced spending on technology.

Opportunities in cloud computing, 5G, and semiconductors

But the macroeconomic and geopolitical anxieties of the past few years may have merely distracted investors from powerful long-term trends that could continue to create opportunities for information technology companies.

For example, virtually every company in every industry is now looking to use technology to get closer to its customers, innovate more quickly, and operate more efficiently. Many firms are embarking on multiyear digital transformation projects, and this may only accelerate as companies adapt to hybrid work environments. Companies that provide the technology to aid in these transitions could be potential beneficiaries of this trend. Firms such as Salesforce (), HubSpot (), Twilio (), and Microsoft () have supported this investment thesis.

In particular, increasing adoption of cloud computing continues to be a disruptive influence, as enterprises shed their in-house hardware-based architecture in favor of cloud-based systems. Roughly 60% of corporate workloads have already moved to the cloud, and that figure is projected to rise to roughly 70% by 2025.1 One of the key advantages of cloud computing is the ability to tap into artificial intelligence and machine learning (AI/ML). Our modern digital economy throws off vast quantities of data every day, and AI/ML can help businesses to organize and make sense of that data—a need that could only grow in the years ahead. Recent holdings that illustrate this investment thesis include Nvidia (), Marvell Technology () and Snap (), as well as previously mentioned and Microsoft.

In telecommunications, the move to 5G wireless networks is well underway. As more bandwidth becomes available, industries—including health care, media, manufacturing, housing, energy, agriculture, and transportation—may find ways to make use of it. That increased bandwidth could help support the move in many industries toward more autonomous systems (such as, eventually, self-driving rideshares). The large cloud platforms in the US—specifically Microsoft Azure, Amazon Web Services (AWS), and Google Cloud—are also working on designing architectures so that they can essentially serve as an extension of mobile networks, effectively merging these networks with their clouds. Stocks that can play a part in advancement of these themes include Marvell Technology, Apple (), and Nvidia, as well as Uber Technologies (), and Lyft ().

Semiconductors are key to bringing all of these technologies to life, and demand for semiconductors could remain high in 2023. The pandemic disrupted supplies of chips for many industries, particularly in automotive production. In response to those disruptions, new chip factories are being built and planned in multiple regions to create more certainty of domestic supplies in the years ahead. Recent holdings that illustrate this investment theme include GlobalFoundries (), Taiwan Semiconductor Manufacturing (), Teradyne (), and ON Semiconductor ().

Fund top holdings*

Top-10 holdings of the Fidelity® Select Technology Portfolio () as of October 31, 2022:

  • 24.7% – Apple Inc. ()
  • 16.8% – Microsoft Corp. ()
  • 5.7% – Nvidia Corp. ()
  • 5.6% – Mastercard Inc. Class A ()
  • 4.1% – Marvell Technology Inc. ()
  • 3.2% – NXP Semiconductors NV ()
  • 3.1% – Salesforce Inc. ()
  • 2.8% – ON Semiconductor Corp. ()
  • 2.4% – Cisco Systems Inc. ()
  • 2.3% – GlobalFoundries Inc. ()

(See the most recent fund information.)

Looking ahead with cautious optimism

After a vexing year, 2023 may be a more interesting and hopeful one for the technology sector. While a recession, should one occur, could slow the pace of the long-term changes that are pushing the sector forward, best-in-class companies benefiting from these themes could nonetheless present long-term opportunities as well as attractive valuations.

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Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully. 1. Source: IDC. *Any holdings, asset allocation, diversification breakdowns or other composition data shown are as of the date indicated and are subject to change at any time. They may not be representative of the fund's current or future investments. The Top Ten holdings do not include money market instruments or futures contracts, if any. Depository receipts are normally combined with the underlying security. Some breakdowns may be intentionally limited to a particular asset class or other subset of the fund's entire portfolio, particularly in multi-asset class funds where the attributes of the equity and fixed income portions are different. Under the asset allocation section, international (or foreign) assets may be reported differently depending on how an investment option reports its holdings. Some do not report international (or foreign) holdings here, but instead report them in a "Regional Diversification" section. Some report them in this section in addition to the equity, bond and other allocation shown. Others report international (or foreign) holding as a subset of the equity and bond allocations shown. If the allocation without the foreign component equals (or rounds to) 100%, then international (or foreign) is a subset of the equity and bond percentage shown.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

References to specific securities or investment themes are for illustrative purposes only and should not be construed as recommendations or investment advice. This information must not be relied upon in making any investment decision. Fidelity cannot be held responsible for any type of loss incurred by applying any of the information presented. These views must not be relied upon as an indication of trading intent of any Fidelity fund or Fidelity advisor. Investment decisions should be based on an individual's own goals, time horizon, and tolerance for risk. This piece may contain assumptions that are "forward-looking statements," which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

Past performance is no guarantee of future results.

Investing involves risk, including risk of loss.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Because of its narrow focus, sector investing tends to be more volatile than investments that diversify across many sectors and companies. Sector investing is also subject to the additional risks associated with its particular industry. The technology industries can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits, competition from new market entrants, and general economic condition. The S&P 500® Index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent US equity performance. The S&P Technology Select Sector index comprises those companies included in the S&P 500 that are classified as members of the technology sector, with capping applied to ensure diversification among companies within the index.

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