Information technology was the best-performing market sector of the S&P/ASX 200 Index (ASX: XJO) in FY24.
The S&P/ASX 200 Information Technology Index (ASX: XIJ) rose by 27.99%, while the ASX 200 lifted by 7.83% (total returns were 12.1% if you add dividends to this capital growth).
ASX tech shares have certainly benefitted from strong market sentiment for technology stocks in the US.
The Magnificent Seven companies, which are either technology developers themselves or use high tech to produce their products and services, continued to impress investors in FY24.
In particular, the artificial intelligence (AI) megatrend has been a tailwind for ASX tech shares and US tech stocks. The share price of quintessential AI stock, Nvidia, rose by 192% in FY24 versus a 28.61% lift in the Nasdaq Composite Index (NASDAQ: .IXIC), a 22.7% lift for the S&P 500 Index (SP: .INX), and a 13.69% increase in the Dow Jones Industrial Average Index (DJX: .DJI).
In Australia, AI-associated stocks also did well. The NextDC Ltd (ASX: NXT) share price ascended 41.72% in FY24. Shares in Goodman Group (ASX: GMG), which is building data centres all over the world for AI, rose by 73.1%.
The top five ASX 200 tech shares for price gains in FY24 were Life360 Inc (ASX: 360) 122.72%, Altium Ltd (ASX: ALU) 84.26%, Megaport Ltd (ASX: MP1) 55.4%, Codan Ltd (ASX: CDA) 49.81%, and Macquarie Technology Group Ltd (ASX: MAQ) 38.42%.
All in all, FY24 was a ripper year for ASX tech shares and US technology stocks.
But will this trend continue in FY25?
'Signs of rotation' out of ASX tech shares
AMP Ltd (ASX: AMP) chief economist Dr Shane Oliver says there are now "signs of a rotation" out of tech shares and into value shares and cyclical stocks.
In the first few weeks of FY25 to date, the ASX 200 technology index has lost 1% in value. Meantime, the S&P/ASX Small Ordinaries Index (ASX: XSO) has risen 2.17% and ASX 200 shares have lifted 2.71%.
In a blog, Dr Oliver said tech shares typically offer higher long-term growth potential. However, value and cyclical shares are more likely to benefit from interest rate cuts and economic growth.
The share prices of cyclical stocks are highly impacted by macroeconomics.
Examples of ASX cyclical shares include Flight Centre Travel Group Ltd (ASX: FLT) and JB Hi-Fi Limited (ASX: JBH). Both companies are impacted by consumer sentiment, which varies depending on macroeconomic factors like wages growth, inflation, and interest rates.
Dr Oliver said the rotation out of tech shares was evident in the US and may benefit ASX stocks.
He explained:
This has been most evident in the US with a resurgence in small caps, with the Russell 2000 small cap index up more than 11% [July 10-17], but it may also benefit the relatively cyclical Australian share market.
With the US earnings season upon us, RBC Global Equity Strategy Research Head Lori Calvasina said (courtesy The Australian):
The thing that we're most interested to get colour on is whether earnings dynamics will give US equity investors a reason to continue the rotation that appeared to begin yet again last week away from Growth, large, and mega-cap, to value, small cap, and everything else.
What's next?
Dr Oliver said the rotation out of tech shares was one of three factors that drove the ASX 200 to a new record high above 8,000 points last week.
AMP tips the benchmark index to end 2024 at about 8,100 points.
But Dr Oliver warns of a "volatile and more constrained outlook" ahead. He reckons there may be a correction in ASX 200 shares during the traditionally weaker months of August and September.
