When investors think about traditionally ‘defensive’ sectors, what usually comes to mind are Utilities, Defense (military spending), Healthcare, and/or Consumer Staples. These are the areas of the economy where demand remains pretty steady all the time, even during challenging periods like recessions. Demand for goods and services in these sectors is inelastic – people always need electricity, medicine, and household goods, and governments are always spending money on the military and defense capabilities.

For this reason, defensive sectors have tended to outperform during weaker parts of the economic cycle, including recessions and bear markets.

Up to this point, technology stocks have never been a part of this group. But during this pandemic and economic recession, technology stocks have been behaving a lot like defensive stocks traditionally during downturns.1 It is worth exploring why.

The numbers bear it out. Year-to-date through May 31st, the Nasdaq is actually in positive territory, with a price return of +6.59%. The iShares Technology ETF, with symbol IYW, is up +8.85%, while the S&P 500 is down -5.29% over the same period.2 Technology stocks outperformed on the way down and on the way back up, while other cyclical sectors took a beating.

I do not see Tech’s outperformance as a fluke, or unjustified. Tech earnings are taking a hit, just like every other sector. But over the last three months, only Utilities, Consumer Staples, and Health Care have posted better earnings than Tech – and not by a lot.

Given the nature of this economic recession, the Tech sector’s relative success should come as little surprise to many readers. The pandemic has dealt a major blow to spending across the economy, but households and businesses have relied on technology more than ever to stay connected, and in many cases, to continue working. A recent poll of Fortune 500 CEOs found that 75% of companies have – or are making – plans to spend more on technology in the coming years.3

Corporate America was already well aware that technology would play a critical role in the future of business, and the pandemic is merely accelerating already existing trends in cloud computing, enterprise software, remote working capabilities, video conferencing, e-commerce, and investment in robust technology infrastructure. In a sense, the crisis played right into the Tech sector’s hands, and stocks are just responding to the secular trends already underway.

Does this mean investors should run out and buy more technology stocks? Not necessarily, in my view. Stocks in the sector notoriously trade at high multiples, and not all technology stocks have robust earnings and cash flows. There is also a legitimate regulation risk for the sector, particularly as lawmakers catch up to antitrust and data privacy issues. The US Justice Department, for instance, has indicated that it may soon file antitrust charges against Google, perhaps as early as this summer. An antitrust lawsuit brought against Google today could be one of the biggest in history, bringing back memories of the Justice Department and 20 states joining together to sue Microsoft in the 1990s.4 A successful lawsuit against Google could create a substantial tail risk for other major technology companies.

Another risk to keep in mind is cyclicality. If the economy starts to pick up steam and fear of the pandemic fades into the background – perhaps because of a vaccine – then investors could use the opportunity to rotate into cyclical sectors that currently trade at far more attractive multiples than Technology. This outcome may happen sooner than most think.

Bottom Line for Investors

There is little doubt that technology will play a critical role in the future of business. Companies across every sector are accelerating plans to invest in new technology that will allow employees to work remote and keep the business moving even during a lockdown. Technology companies that build infrastructure and provide software and services are likely to benefit long-term as a result.

Investors do not have to go all-in on Tech in order to participate, however, and doing so is a risky proposition – particularly as many new technology companies focus more on growth over cash flows and earnings. An overweight to the Technology sector within a broadly diversified portfolio is a smarter approach, in my view, giving investors the benefit of exposure to an exciting growth sector in a risk-controlled way.


1 The BlackRock Blog, May 26, 2020. https://www.blackrockblog.com/2020/05/26/why-technology-is-proving-surprisingly-defensive/

2 Yahoo Finance, June 1, 2020. https://finance.yahoo.com/

3 The BlackRock Blog, May 26, 2020. https://www.blackrockblog.com/2020/05/26/why-technology-is-proving-surprisingly-defensive/

4 The Wall Street Journal, May 15, 2020. https://www.wsj.com/articles/justice-department-state-attorneys-general-likely-to-bring-antitrust-lawsuits-against-google-11589573622


Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.