Estimate Time6 min

Technology: Powerful long-term potential

Key takeaways

  • The tech sector had a strong past year, as pivotal advancements in artificial intelligence (AI) helped drive renewed investor enthusiasm for the sector.
  • Generative AI has the potential to be transformative—but it may take many years for companies to incorporate it into their workflows.
  • There may be a number of stages of adoption of AI, which might each present distinct investing opportunities.
  • Most recently, I’ve found opportunities among semiconductor companies that create chips and systems used in AI applications, as well as among certain cloud software providers.

The technology sector has had an outstanding past year. A shifting macroeconomic environment in 2023 helped bring tech stocks back into favor with investors. The resulting rally was further fueled by groundbreaking advancements in artificial intelligence (AI), which heralded the possibility of a promising new era of innovation for the sector.

This year, tech’s performance will of course depend, to some extent, on the macro environment. But for investors more focused on the long term, trends like the development and adoption of AI, continued digitization, and the move to the cloud, have the potential to drive growth for the sector for years to come.

Fidelity Viewpoints

Sign up for Fidelity Viewpoints weekly email for our latest insights.

Tech has entered a new era

The past year was a humbling reminder of how much market conditions can shift in a year. A year ago, tech was coming off a year of double-digit losses, which had some investors wondering if the sector’s best days were behind it. Tech sector performance can be heavily influenced by interest-rate policy—more so than some other sectors. The aggressiveness of the Fed’s rate-hiking cycle, plus the stubbornness of inflation for many months, had depressed many tech stocks by the start of 2023.

But last year brought a change in the winds. As inflation cooled, the end of the Fed’s rate-hiking cycle seemed to come into view, which helped spur relief rallies. Investor preferences shifted strongly in favor of tech stocks again—as the splash of ChatGPT’s launch was followed by surging results at some AI-related firms. Tech closed 2023 as the top performer among all market sectors, and as of late January was continuing to outperform the S&P 500® in 2024.

Chart shows one-year price performance of the technology sector, compared with that of the S&P 500. In the year through January 22, 2024, the sector had gained 53%, compared with a 22% gain for the S&P 500.
Past performance is no guarantee of future results. Technology sector performance is represented by the S&P Technology Select Sector Index. Data as of January 22, 2024. Source: S&P Dow Jones Indices, a division of S&P Global.

For this year and beyond, AI is clearly not the only big trend driving the sector, but it is perhaps one of the most potentially transformative ones. That said, for investors, the key may be not just to follow the trend, but to identify the various stages of AI adoption that may play out, and to identify timely opportunities at attractive valuations along the way.

Putting the rise of AI into context

Since the arrival of the chatbot ChatGPT in November 2022, practically every company and every boardroom, across virtually every industry, has been discussing how to embrace large language models used by generative-AI applications—the kinds of models that can generate high-quality text, images, and other content. Potential anticipated benefits have been cited as increased productivity, personalized customer experiences, accelerated research and development, and an expanded range of feasible business models.

There is clearly a lot of discussion, publicity and, at this stage, even hype around generative AI. I believe generative AI has the potential to be transformative in the long run. However, because of its complexities—which include identifying use cases, and building and training models—generative AI likely will not be able to deliver these benefits overnight. Rather, it may take many years for most enterprises to implement AI into their workflow. 

Timing, specifically having the right timing, matters in investing, and I expect there could be several phases in the course of AI adoption that offer investors timely opportunities. Although innovation is happening rapidly—almost daily, along with potential regulatory oversight—the current phase of AI is centered around “picks and shovels,” meaning building out the overall infrastructure needed to develop and adopt AI. Later stages of development may move to productivity applications serving different end markets.

Semiconductors have continued to look attractive

In looking for such pick-and-shovel companies, I have found opportunity among semiconductor companies. For example, Nvidia () has been investing in AI for more than 10 years. Its advanced graphics chips are the lifeblood of new generative AI systems. Additionally, its full-stack, end-to-end solutions of chips, software, and systems have positioned it well as a provider of choice for large cloud-service providers and enterprises looking to embrace generative AI.

Fund top holdings1

Top-10 holdings of the Fidelity® Select Technology Portfolio () as of December 31, 2023:

  • 18.8% – Microsoft Corp. ()
  • 15.6% – Apple Inc. ()
  • 13.4% – Nvidia Corp. ()
  • 4.4% – NXP Semiconductors N.V. ()
  • 4.2% – Marvell Technology Inc. ()
  • 4.2% – ON Semiconductor Corp. ()
  • 4.0% – ServiceNow Inc. ()
  • 3.7% – Salesforce Inc. ()
  • 3.5% – Cisco Systems Inc. ()
  • 3.4% – Okta Inc. ()

(See the most recent fund information.)

Marvell Technology () is a data-infrastructure company that makes several key pieces of technology—including optical interconnectivity and application-specific chips—to assist large cloud providers in AI development. And lastly, Taiwan Semiconductor's ()2 position of leadership in process technology for semiconductor manufacturing has made it a manufacturer of choice for those requiring high-end computing solutions, such as generative-AI applications.

In addition to the tailwinds from AI, semiconductors have seen advantages from a number of other recent trends. Geopolitical tensions have been fueling a focus on boosting semiconductor supply chains. And chips are key enablers of the shift to electric vehicles and driver-assistance systems. Against this backdrop, semiconductor stocks have recently had a sizeable overweight in the fund.

Cloud spotting

Increased adoption of cloud computing was already a major trend before the recent developments in AI. Companies have been increasingly moving their workloads to the cloud, a trend that might only accelerate as companies work to put in place the infrastructure they’ll need to employ AI.

Companies that offer cloud-based software, that already have large installed bases, and that are working to adopt AI, could be potential beneficiaries if these trends continue. For example, ServiceNow () is a provider of cloud-based software applications that help businesses organize and automate personnel, customer service, and information technology operations. Another company that has exemplified this investment thesis is Okta (), a provider of cloud-based security software. Identity and access management solutions like those provided by Okta are becoming increasingly important as employees and customers access corporate applications from wherever they are.

A strong long-term outlook

As 2024 takes shape, the macroeconomic outlook remains unclear, with recession still a possibility. However, as a sector portfolio manager I focus on the long term, including trying to identify which companies could see the greatest boosts to long-term growth from emerging innovations and trends.

These trends could be temporarily slowed if a recession were to finally hit this year. But I believe they may provide a tailwind for certain companies in this sector for years to come. And although the best growth stories often trade at a premium to the market, I focus on companies where I believe future growth is not reflected in the current share price. I am excited to see where some of these growth stories take us.

Adam Benjamin
Portfolio Manager

Adam Benjamin is a research analyst and portfolio manager in the Equity division at Fidelity Investments.

Mr. Benjamin manages the Fidelity Advisor Technology Fund, Fidelity VIP Technology Portfolio, Fidelity Select Semiconductors Portfolio, Fidelity Select Technology Fund, Fidelity Advisor Semiconductors Fund and the information technology sleeves of the Fidelity Institutional Asset Management (FIAM) Large Cap Core and Global Core sector strategies. He also covers the large cap semiconductors industry.

Prior to assuming his current roles, Mr. Benjamin was a research analyst responsible for the coverage of the semiconductor, semiconductor capital equipment, and solar end markets. Most recently he served as global technology sector leader within FIAM.

Before joining Fidelity in 2011, Mr. Benjamin served as managing director and head of semiconductor equity research at Jefferies & Company, Inc. Previously, he held various roles at SG Cowen, including senior research associate focused on the semiconductor space and vice president in the Technology M&A group. Mr. Benjamin was also an associate in the Corporate Law department of Sullivan & Worcester. He has been following the technology sector for over 18 years.

Mr. Benjamin earned his bachelor of arts degree from Cornell University and his juris doctor degree, cum laude, from Suffolk University Law School.

Research stocks, ETFs, or mutual funds

Get our industry-leading investment analysis, and put our research to work.

More to explore

Sector ideas

Get more investing ideas and sector insights.
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. 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. 2. Fidelity® Select Technology Portfolio (FSPTX) held a 1.62% position in this stock as of November 30, 2023.

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. Investing in stock involves risks, including the loss of principal.

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.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917