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Research Highlights - 04/09/2024

Research Highlights - 04/09/2024

April 09, 2024

Information Tech Represents 5% of U.S. GDP, But 30% of U.S. Stock Market

You read that correctly. The Information Tech sector contributes just 5.4% (as of Q3'2023) as a percentage of U.S. GDP, according to the Federal Reserve Bank of St. Louis. This almost seems like a joke, considering that this very same sector represents 29.66% (as of 04/09/2024) of the total U.S. stock market (as measured by the Wilshire 5000 Index).

By comparison, the Financial Services sector represents 20.7% (as of Q3'23) of value added to U.S. GDP. However, its total market cap is only 15.52% (combined 12.70% financial services + 2.82% real estate). Based on these two sector comparisons alone, which you could do on every sector in the U.S. economy, you'd likely also conclude that the IT sector demonstrates its dominance in the public equity markets while woefully under-contributing to "the sum of the costs-incurred and the incomes-earned in production, and consists of compensation of employees, taxes on production and imports, less subsidies, and gross operating surplus" (as The Fed puts it).

There's been a high correlation to GDP and market cap levels for decades, as the featured chart in this post illustrates. When GDP collapses, so does market cap. Therefore, it's safe to say that companies within an economy represent market values that are in large part due to the overall state of the economy. This isn't always true, as I've written in previous Research Highlights, but generally it's reasonable that an economy's growth (or malaise) is reflected, at least in the very short-term, by the contributions of its constituent companies.

So, why does the Information Tech sector receive so much demand for the shares of its companies relative to any other sector in the U.S. economy today? My perspective is that it's based solely upon the irrational exuberance of investors' expectations that the IT sectors' revenues and profits will continue to grow at an exponential rate thereby closing this mammoth chasm in market valuation to GDP. In reality, advancements in various technologies (whether A.I. or robotics) positively impact all industries. Ultimately, how impactful and how positive will depend on many variables at each industry-level and further within each company-level. Certainly, IT sector will benefit too, but it may have many years to fully realize/earn the market caps already bestowed upon it.


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