What Does Downgrade Mean for the Tech Sector?

The tech sector is taking a hit following last Friday’s downgrading of the US debt rating by credit rating agency Standard & Poor’s. This is the first time since the country won the top rating in 1917 that it has been downgraded. This removed the world’s largest economy from the Triple A-club for the first time ever.

The agency downgraded US rating from AAA to AA+ on concerns that the government lacks the political will to tackle its financial problems, including a massive budget deficit and rising debt levels. It is widely argued that S&P's move will raise borrowing costs -- not only for the American government, but also for consumers and for companies.

Its effects are already been seen in the stock market, where technology and other sectors are taking a beating. The 10 biggest players in the tech sector, including Apple, Microsoft, IBM, Google, Oracle, Intel, Siemens, Qualcomm, Cisco and SAP were all down after the opening bell on Monday. This comes just a month after a two-week market rally in technology came to a screeching halt when the U.S. Bureau of Labor issued its monthly job survey -- proving once again that tech shares remain very sensitive to wider economic conditionis.

The simple reason is that consumers and businesses still see technology as products and services that aid business, rather than tools necessary to doing business. Thus when money is tight less is spent on hardware, software, and other tech goods and services. This is especially true of small businesses and home office workers, who will instead likely try to carry on with existing equipment.

The obvious question now is what can the United States do to get the rating back up. But because the is unprecedented, the answer isn’t so clear. For starters, though, we can listen to the words of wisdom from China, which now is the fourth largest owner of American debt: and that is to spend within our means and not run up so much debt.

For many, even for small business, that is easier said than done. For one thing, many times, “you have to spend money to make money.”  

Fortunately, the truth is that the tech sector is resilient. Even as Japan was recovering from an earthquake this spring, and oil prices jumped, there was still strong underlying confidence in the tech sector. Don't forget that many of the companies feeling the pinch in stock prices right now issued strong financial reports for the first quarter of 2011.  

Technology is still seen as the source of innovation , and while borrowing costs will no doubt rise for many companies, the tech sector is likely to weather this storm in relatively good shape. The question is whether the rest of the country can do the same?