This stock index – which you maybe never heard of – is nearly as vibrant as tech
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With AI hype dominating the stock market, you can probably guess – and guess correctly – that this year’s top-performing global stock sector is tech. But which sector has come in just a whisker behind it?
Call, text, email or otherwise message your broker: It’s a funny index that’s barely six years old called “Communication Services.”
Never heard of it? You aren’t alone. So what is it, and does it have staying power?
Communication Services mashes growthy, tech-like firms with traditional media and stodgy old telecoms – a tale of diverging industries.
Its predecessor was the telecom sector – classically defensive, highly regulated, boring, slow-growers. Their steady revenues, big dividends and low volatility make them pretty darned economically insensitive.
Hence, they lead in down markets. Consider: S&P 500 telecom stocks beat the broader index in four of five bear markets since 1990. The exception, 2000 – 2002, was when fantasies like WorldCom, Global Crossing and Lucent fantastically imploded.
But stodginess cuts both ways. Telecom lagged in four of the last five bull markets—hugely. The average underperformance? A whopping 128%. Since October 2022’s low, S&P 500 and World Telecom returns are less than half the broader indexes’ gain.
In 2018, however, index providers S&P and MSCI did some rejiggering – maybe a little too quietly – that shook up how investors can approach many of these companies.
Namely, they concluded several Silicon Valley giants didn’t belong in tech anymore. They were 21st Century takes on communications, profiting more on ads than hardware and software. Their solution?
Combining several tech giants with media companies and defensive telecoms in a new “Communication Services” sector.
Communications is no longer just about phone lines, wired or wireless. It’s also search engines, social media, streaming and online commerce. The old telecom industry is now just 17% of the new sector’s market cap globally, lower still in America.
Meanwhile, the Interactive Media & Services industry dominates, comprising 62% of the sector globally. Nearly all of that is American – almost 99%. You know the big names – Meta and Google parent Alphabet.
But it also includes online recruiting, web-based auto selling and buying firms, and more.
Communication Services also includes the entertainment industry, 15% of market cap – home to big streaming and gaming firms (also tech-like!). The other 7% is media – cable providers, TV networks and advertisers.
Hence, large parts of this diverse sector act like tech: low-to-no dividends, low barriers to entry, fat gross operating profit margins (GOPMs in accounting lingo), big reinvestment in innovation, buzzy offerings … and huge growth.
These tech-like tendencies juice returns in bull markets—including 2024’s. Hence, the MSCI World Communication Services’ 19.3% overall return, powered by Interactive Media & Services’ 29.9% surge. That tops tech’s 25.5% – and cruises past world stocks’ overall 11.4%.
The sector’s entertainment firms are up 14.1%, too. But its telecom segments languish: Wireless and Diversified Telecoms are up just 7.9% and 2.2%, respectively. All parallel trends date to this bull market’s October 2022 birth.
Few saw that coming – just the opposite, after tech-like Communication Services stocks got whacked in 2022. But sentiment got too sour. Markets looked forward and saw a brighter reality ahead, fueling a rally.
Stocks presciently pre-priced the sector’s 46.3% first-quarter profit rebound.
So, can Communication Services keep leading? Yes and no. Telecoms shouldn’t lead until the next downturn. While the bull market charges, the sector’s tech-like chunk should shine as corporations are toggling to offense after two years of cost-cutting defensive maneuvers. Their enviable GOPMs (see above) enable them to self-finance growth, rendering interest rates feckless. The advertising market, central to many of these firms, should reheat, too.
Bottom line: Diversify across the offensive industries. Go light on the defensive ones.
Ken Fisher is the founder and executive chairman of Fisher Investments, a four-time New York Times bestselling author, and regular columnist in 21 countries globally.