The technology sector has been the best-performing sector in the S&P 500 for the last two years. Although the COVID-19 pandemic has caused economic uncertainty, it has proven to be the biggest boon to tech companies like Microsoft, Amazon, Alphabet and Facebook.

As more people across the globe stayed and worked from home, it increased the demand for cloud computing, online shopping and social networking. The secular shift to online shopping and cloud computing was already in progress before the pandemic, but it has significantly accelerated the adoption. As a result, these big tech companies were able to pull forward multiple years’ worth of earnings in 2020. During the third quarter of 2020, Amazon’s profit nearly tripled from a year earlier, while revenue soared 37%. Similarly, Microsoft saw two years’ worth of digital transformation in the first two months of the pandemic.

At the same time, we have also seen increased scrutiny of big tech by Congress and the Department of Justice. The recent political events will further increase the attention to how big these companies have gotten and the power of their platforms over public discourse.

Westwood Select Equity has been underweight technology sector due to its expensive valuations. We believe that tech companies have very lofty 2020 growth rates to match in 2021. This combined with increased scrutiny will likely keep the sector range-bound in the near future. We continue to be positive on consumer-driven stocks like restaurants, travel and cosmetics. As more people get vaccinated, we expect to see a pickup in demand for eating out and vacations.

As of 1.12.2020