HOLT: Strong fundamentals, elevated expectations

Recent volatility has renewed focus on the technology sector and its role in driving market performance. While comparisons with previous periods of concentrated market leadership have emerged, today's environment also reflects a much stronger level of profitability and value creation.

Technology stocks, particularly those linked to the AI investment cycle, have been responsible for a significant share of recent market gains. Market leadership has become increasingly concentrated, with a relatively small group of companies driving performance across the broader market.

Unlike the late 1990s, today's technology sector is supported by substantially higher levels of economic profit and value creation. At the same time, market expectations remain elevated, with investors pricing in significant future growth from companies across the AI ecosystem.

As a greater share of market value becomes linked to future growth expectations, changes in inflation and interest-rate expectations can have an increasingly important influence on valuations and market behaviour.

While technology remains the focal point, elevated growth expectations are evident across several areas of the market. Understanding the balance between fundamentals and expectations is becoming increasingly important as market leadership narrows and concentration rises.