Investors seeking white-hot growth over the past decade or so could do no better than investing in the best tech stocks.
Try to list some of the biggest investing mega-trends in recent memory; you'll find it difficult to think of anything that doesn't involve the information technology sector.
Semiconductors. Big data. The Internet of Things. Cloud computing. Machine learning. Artificial intelligence.
Technology investing is now almost synonymous with growth investing. The sector has been the top performer – by leaps and bounds – over the past decade. And it's responsible for five of the market's 10 top-performing stocks during this time frame.
If you think that outperformance will continue and you want to stake your own claim in the sector, read on.
Today, we'll explore the information technology sector, including how it's defined, why investors seek exposure to it and how to find the best tech stocks to buy.
What are tech stocks?
You can typically guess a firm's sector based on a gut feeling. If a business has mining operations, it's probably a materials stock. If a company's predominant business is banking services, it's probably a financial stock.
But the information technology sector is a difficult one to hammer down on vibes alone, for two reasons.
In late 2018, the Global Industry Classification Standard (GICS) – a framework used by major index providers to classify public companies – created the communication services sector. The problem? Communication services is made up of many companies that were once considered technology firms. Adding to the confusion, a few of its components came from other sectors. Once upon a time, Facebook parent Meta Platforms (META) and Google parent Alphabet (GOOGL) were tech stocks. Today, they're communication services stocks.
A second factor is that companies in every sector are increasingly reliant on technology. Industrial firms use automation technology. Retailers might generate huge chunks of their revenue via websites. And this sometimes blurs the lines between companies that belong to the tech sector and those that are simply tech-reliant.
The best way to understand the "tech stocks" umbrella is to read it from the GICS itself.
Briefly, the tech sector includes companies that provide services related to the sector, such as information technology, systems integration, and electronic data processing; that produce and develop software for business or consumer markets; that distribute technology hardware; and that make semiconductors.
Why do investors buy technology stocks?
We gave away the plot a couple paragraphs ago: "Companies in every sector are increasingly reliant on technology."
No matter where you look or what you do, technology is a bigger part of your day, whether you're at home, at work or out enjoying the world. Everything from healthcare records to everyday groceries involves microchips, software, artificial intelligence and the internet.
And there's no reason to believe that trend will change anytime soon.
"To a large degree, technology is impacting all sectors of the economy in all walks of life," says Terry Sandven, chief equity strategist with U.S. Bank Asset Management.
"Companies are looking to get bigger, faster and stronger," Sandven adds. "They're not doing that through hiring more people. They're doing that through technology spending."
It's no wonder, then, that technology has been an engine of growth for many years.
Over the trailing decade through September 2024, tech stocks have been the hands-down best sector by a country mile, at 20.5% average annual returns. That's a little more than 7 percentage points of outperformance against the S&P 500 and 7.5 points better than the second-best sector (consumer discretionary, 12.9%).
Another data set showing how dominant technology has been is a chart of S&P 500 sector performance over a five-year rolling period, provided by Standard & Poor's. That chart shows the technology sector has been tops in each of the past seven years and in 15 of the past 20.
And YCharts shows that five of the best 10 stocks of the past 10 years were from the tech sector.
Even if you don't explicitly seek tech sector exposure, there's a good chance your portfolio is chock-full of it.
Thanks to mega-caps like Apple (AAPL) and Microsoft (MSFT), 32% of the S&P 500 Index's weight is assigned to the information technology sector. Add in tech-like communication stocks and you're looking at 40%.
And none of that considers tech-heavy companies from other sectors, such as consumer discretionary giants Amazon (AMZN) and Tesla (TSLA).
That means if your entire portfolio was simply shares of an S&P 500 index fund, almost a third of your exposure would be to the information technology sector, and more than 40% would be to tech and tech-like stocks.
The general idea goes for anyone investing in a wide variety of broad-market index funds, not just those tethered to the S&P 500.
How to find the best tech stocks to buy
Given the variety of reasons you might invest in the sector, we're not going to assume we know exactly what you want out of a tech stock.
But we can help you start your search with a basic quality screen.
To get to the following list of the best tech stocks to buy, we've looked for technology-sector firms…
Within the S&P 1500: The S&P 1500 is made up of the S&P 500, the S&P MidCap 400 and the S&P SmallCap 600. In other words, our search will include a wide variety of large- and mid-cap stocks as well as the market's strongest small-cap stocks.
With a long-term estimated earnings-per-share growth rate of at least 15%: Because we're looking for tech stocks to invest in, and not just short-term trades, we want to set a high bar for earnings growth across several years. (Just remember that expectations aren't a guarantee of results.)
With at least 10 covering analysts: We'd like to look at stocks that are on Wall Street analysts' radar, which makes it more likely there is more reporting and more insights on these companies. The more research we have at our disposal, the better informed our decisions will be.
With a consensus Buy rating: A stock must have an average broker recommendation of 2.5 or less within S&P Global Market Intelligence's ratings scale. S&P Global Market Intelligence converts analysts' ratings into a numerical scale. Anything with a score of 2.5 or lower is considered a Buy. Every stock that made the list has a score of 1.5 or lower, which is considered a Strong Buy – the highest designation.
If these particular criteria seem familiar, that's because they're exactly the same criteria we used when looking for growth stocks.
We've simply applied them just to tech stocks rather than all the stocks within the S&P 1500.
Here's the list of the best tech stocks to buy:
