Power your portfolio: The benefits of technology stocks

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As investors grapple with the pressures of inflation, tighter monetary policy by the Federal Reserve, rising interest rates and the impact of the invasion of Ukraine, sentiment has once again shunned technology stocks in favor of more economically and interest-rate-sensitive sectors of the market.

Tech stocks have enjoyed strong returns over the last decade, causing many investors to look for new opportunities away from the sector. Naysayers who suggest the sun has set on tech stocks might be surprised to learn otherwise.

With all of this in mind, let’s take a look at why having an allocation to tech stocks in your portfolio will benefit you in the current environment and beyond.

The beauty of pricing power

As many businesses increase prices in order to offset cost inflation, tech companies are poised to benefit considerably from the pricing power they have for the products and services offered.

Tech companies such as Microsoft and Amazon offer services many of us have come to rely on in our everyday lives. The stickiness many of these businesses have with their customers allows for small price increases to positively impact profitability.

Many also have recurring streams of revenue from subscription-based services. Take Apple, for example: the company enjoys strong margins across all of its products and collects a steady stream of revenue from subscription services like cloud storage and Apple music. By slightly increasing these fees, Apple, and companies like it, can see a meaningful impact to overall earnings.

Tech companies — relative to other sectors of the market — are among businesses that offer the highest operating margins, return on capital and highest free cash flow per share. As an investor, these are important characteristics to consider with holdings in your portfolio.

Rising rates and stock market performance

Historically, periods of rising interest rates have generally been met with higher stock prices. If you take the 10-year treasury bond over the last 15 years, for example, periods when the yield moved higher from trough to peak resulted in stock prices up double digits.

Most notably, tech stocks performed exceptionally well relative to the S&P 500 between 2007 and 2022, meaning that these stocks produced a better rate of return than the market.

It’s all about quality

When it comes to long-term investing, the focus should be on participating in high-quality ventures while understanding your risk exposure — particularly in the companies in your portfolio and/or the mutual fund and/or exchange traded funds you own.

During the height of the COVID-19 pandemic in 2020, investors were quickly reminded of the importance of owning companies with healthy balance sheets and free cash flow. Tech stocks benefited tremendously as many generate high levels of free cash flow and hold cash rich balance sheets, providing a margin of safety during times of uncertainty.

More importantly, the acceleration in digital transformation we witnessed during the pandemic was a huge windfall for tech stocks.

Over the last three years, utilization of the digital landscape has become a necessity for both consumers and businesses, leading many to believe we are in the midst of a technological revolution. From businesses marketing to their customers online over traditional advertising methods to healthcare providers increasingly offering more telehealth options, it’s no surprise that these stocks are being seen in more and more investment portfolios.

When it comes to your own investments, financial advisors will remind you that diversification remains important, but consider investing in secular growth opportunities in technology to bring balance to your portfolio for the future.