United StatesThe US is home to many of the world’s most dynamic technology companies. Rubbing shoulders with the ‘Magnificent 7’ that tend to dominate investors’ attention are scores of smaller companies focused on emerging niches within the global digital economy.1
We believe these small-cap technology (tech) innovators can present compelling long-term investment opportunities, especially following the recent stockmarket sell-off. Amid elevated risks of recession, we believe business models focused on structurally growing areas like digital infrastructure can better withstand a challenging macroeconomic climate.
* P/E = price-to-earnings
Source: Bloomberg, 22 April 2025. Data from 23 April 2015 to 22 April 2025.
Subhead: Forward price-to-earnings ratio of S&P500 Technology vs S&P SmallCap 600 Technology
Overview: This line chart compares the forward price-to-earnings (P/E) ratios of the S&P 500 Technology index of large-cap US technology companies and the S&P SmallCap 600 Technology index of small-cap US technology companies between April 2015 and April 2025.
Overall, this chart shows that US large-cap tech stock valuations have diverged from US small-cap tech stock valuations over the past six years. As of 22 April 2025, their respective P/E ratios stood at 23.3 and 12.8 times forward earnings, having both been roughly 15 times forward earnings a decade ago.
Acute stockmarket concentration
The S&P 500 has been dominated by the technology sector for a decade. Technology stocks make up roughly 30% of the US large-cap index.2
While this may no longer seem exceptional, the following figure surely should: three companies alone make up around 60% of the S&P 500 Information Technology sector by value (and so almost 20% of the overall index).3 This reflects a degree of US stockmarket concentration not seen in more than half a century.4
Until the recent market sell-off in early 2025, the forward price-to-earnings (P/E) multiples of ‘Big Tech’ stocks have generally trended upward, supported by consistent earnings growth.5 Indeed, large technology companies have accounted for the vast majority of S&P 500 earnings growth over the past decade.6
Unlike their mega-cap peers that dominate vast and growing global markets, small-cap US technology company valuations have in aggregate fallen towards 10-year lows, relative to earnings. The forward P/E of technology companies in the S&P SmallCap 600 Index stood at 12.9x on 22 April 2025, almost 30% below its five-year average.7
Innovative niches within digital infrastructure
In this context, we believe that active investors can find quality growth companies among the highly diverse and less well researched US small-cap tech universe.
We observe several innovative smaller technology companies that, through their products and services, are enabling – and participating in – the structural trend towards digitalisation. Some of the most dynamic niches lay within digital infrastructure.
According to estimates by McKinsey, global demand for data centre capacity could grow by roughly 20% a year until 2030.8 Among companies exposed to this trend is Ciena, a leading provider of advanced optical solutions to connect data centres. Capacity and speed underpin the adoption of artificial intelligence (AI) tools. Ciena’s integrated hardware and software can enable reliable high-speed data traffic between data centres, increasing bandwidth and reducing latency.
Soaring data traffic – which is rising by around 15% a year – meanwhile places strain on networks with dense concentrations of users, like academic institutions and hospitals, where efficient Wi-Fi is essential to productivity.9 Extreme Networks has emerged as a leading provider of cloud-based solutions that deliver fast, robust and secure Wi-Fi networking in these environments. The company is differentiated by its vertical integration: it controls the design, manufacturing, implementation and management of its distributed campus network architecture.
Key to advanced digital infrastructure are innovations in the semiconductor technologies that underpin high-performance computing. Manufacturers of high bandwidth memory chips needed for AI tasks are adopting advanced multi-chip packaging technologies developed by the likes of Onto Innovation. Advanced packaging – the process of vertically stacking chips to improve performance and make better use of space – is a growing niche as technical advances in chip manufacturing slow.
Secular growth can support resilience
Economic downturn in the US presents a challenging macroeconomic backdrop for smaller domestically-focused companies. In this context, business models aligned with structural growth trends should be more resilient.
It is our conviction that the transition towards a more sustainable global economy creates secular, long-term growth opportunities for companies whose products and services support it. Digital infrastructure is key to enabling more resilient and inclusive economies. Big Tech will continue to drive advances given their scale and resources, but their smaller peers’ success in carving out niches within the digital infrastructure ecosystem illustrates the expanding opportunity set.
For investors willing to look beyond companies that dominate the headlines and identify business models exposed to secular growth, we believe there remain pockets of value within the vibrant US technology sector.
1 The ‘Magnificent 7’ group of US mega-cap technology stocks is comprised of Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla
2 S&P Dow Jones Indices: S&P 500, as of 31 March 2025
3 Apple, Microsoft and Nvidia. Source: Bloomberg data, 22 April 2025
4 Pauley, B., Bales, K. & Schreiber, A., 2 April 2025: Market Concentration and Lost Decades. CFA Institute
5 Bloomberg data, 22 April 2025
6 Goldman Sachs, 27 March 2025: 25 Years On; Lessons from the bursting of the technology bubble
7 Bloomberg data, 22 April 2025
8 McKinsey, October 2024: AI power: Expanding data center capacity to meet growing demand
9 DE-CIX, January 2025: Global Data Traffic Volume Hits New Record-Breaking High at Internet Exchanges
References to specific securities are for illustrative purposes only and should not be considered as a recommendation to buy or sell. Nothing presented herein is intended to constitute investment advice and no investment decision should be made solely based on this information. Nothing presented should be construed as a recommendation to purchase or sell a particular type of security or follow any investment technique or strategy. Information presented herein reflects Impax Asset Management’s views at a particular time. Such views are subject to change at any point and Impax Asset Management shall not be obligated to provide any notice. Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary. While Impax Asset Management has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability or completeness of third-party information presented herein. No guarantee of investment performance is being provided and no inference to the contrary should be made.