Beyond tech: The rest of the economy is waking up

Executive Summary

If the last 20 years in public equity investing have been dominated by the technology sector, the story of the next 20 years may be about the awakening of the rest of the economy. This narrative is already taking shape. Even among the so-called “Magnificent Seven,” often considered synonymous with Big Tech, more than half are not classified within the technology sector.¹

In our more than 50 years of investing in innovation, we have continuously tracked which parts of the economy are bright spots for invention and progress. One of our three main investing tenants is that innovation is everywhere. As our title for this piece suggests, innovation is now truly everywhere. Today, many of the largest market opportunities we see are in areas of the economy like transportation, industrials, financials, health care, retail and energy. These sectors are not just poised for transformation; the change is already happening.

Investing in innovation demands flexibility

As we enter the Fourth Industrial Revolution, we expect to see the influence of its general purpose technologies spread across the economy. Digitizing information into computer bytes defined the Third Industrial Revolution. We anticipate that the ever-more intelligent application of that information to the physical world, whether through atoms or genes, will drive the Fourth Industrial Revolution.

Sweeping innovation of this sort, by definition “brand new,” often resists correct categorization, at least initially. When the first version of “search” came out in 1997, it was not immediately apparent that this technology would upend the advertising industry. The first Harvard students who joined Facebook in 2004 probably did not anticipate that the fledgling social network would disrupt the entire media ecosystem. Because Google and Meta made use of the internet and software, the ratings agencies put both companies into the technology sector. Not until 2018 were they correctly recognized as media companies and moved from technology to communications services.

This phenomenon is still happening today. As we noted in this paper¹, Palantir, a defense company, is currently categorized in technology, but we do not think this is permanent. Other firms engaged in innovative and misunderstood endeavors may also face this initial mis-categorization. Yet, we predict this will become less frequent.

This is not to say that investment decisions should hinge on identifying proper and improper classifications. Rather, it is an argument for a flexible investing mandate. The fluid nature of innovation is best captured by managers who can pursue what is most interesting and promising in the economy, regardless of what sector, wrongly or rightly, those companies find themselves classified in.