Cost-cutting firms continue to spend on technology

The unprecedented impact of the coronavirus pandemic on the economy led companies to take a defensive stance in terms of spending in 2020. A McKinsey survey showed that 52% of respondents cut their variable costs over the last 12 months, while 43% cut fixed costs and 29% reduced their physical footprint. Similar trends were seen in employee levels; 43% of firms reduced full-time equivalent employees last year versus 19% who added personnel. These expense reductions are helping support profit margins in current earnings reports. Many of the learnings from the past year are likely to remain in place moving forward.

One obvious area where firms bucked the cautious spending approach was technology. The increase in working from home, along with renewed cyber-crime worries and a continued shift towards online shopping, drove a sharp increase in technology investment. Nearly two-thirds of respondents in the McKinsey survey noted an increase in funding of technology initiatives, while just 7% cut tech expenditures. Similarly, 44% of companies increased their technology-oriented employees, versus 11% who trimmed their tech staffs.

While the unusual nature of the past year substantially influenced this data, there are clear signals for the direction of the economy and potential beneficiaries in the equity market. The technology sector has proven to be critically important to the economy in times of stress, and spending in this area has mostly been durable during recessionary environments. Since the financial crisis, the technology sector has outperformed the broader S&P 500® Index by nearly 500% cumulative (1,020% versus 530%). While valuations are elevated for the tech sector at present, these firms have multiple levers to sustain growth in times of stress. That could help keep technology stocks out in front, though, as the current market cycle continues.