Key takeaways
Technology stocks remain in the spotlight amid fast-moving developments centered around advances in artificial intelligence (AI).
Markets were briefly upended in late January 2025 as a new, China-based AI competitor emerged.
Corporate spending on technology enhancements remains strong, which may support continued rapid sector growth.
Large technology companies, which already dominate the investment landscape and, in 2023 and 2024, led a strong equity market rally, remained highly visible at 2025’s outset. The so-called “Magnificent Seven” stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla) continue to command the attention of investors, with significant focus centered around artificial intelligence (AI) breakthroughs.
Most notable was the introduction, in late January, of a Chinese-developed AI platform known as DeepSeek. Along with delivering results comparable to many existing, American platforms, it was reportedly developed for a far lower cost and requires much less energy demand to operate than other models. The stock market’s reaction was swift. In a single day, Nvidia’s stock lost a record-breaking $600 billion in value, a 17% drop. Nvidia is currently the largest producer of high-end semiconductor chips used for AI development. Markets suffered a significant, one-day loss, though on the following day, stocks regained some lost ground.
“There are a lot of questions about DeepSeek’s impact that have yet to be answered,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management. “The immediate concern is that not as many Nvidia chips will be required to develop AI applications. On the other hand, based on time-tested economic theory, if programming costs decline, demand for chips could rise.”
These developments come following a second consecutive year of stellar technology stock performance. In 2024, the S&P 500 Communications Services and Information Technology index gained 37.39%, following 2023’s gain of 57%. By comparison in 2024, the broader S&P 500 Index gained 25.02%. Year-to-date through January 28, 2025, performance was flatter at just 1.12% for the technology index, while the S&P 500 gained 3.24% over the same period.1
Although January’s AI developments added a level of technology sector uncertainty that didn’t exist before, the outlook in general remains favorable. AI and cloud computing account for a significant portion of today’s corporate spending, as companies seek to enhance productivity and boost their bottom lines. “The information technology spending we’re seeing is not just from consumers, but on a business-to-business basis,” says Eric Freedman, chief investment officer for U.S. Bank Asset Management. “That’s what companies are spending their capital on, so that’s where we want to be positioned.”
“The information technology spending we’re seeing is not just from consumers, but on a business-to-business basis,” says Eric Freedman, chief investment officer for U.S. Bank Asset Management. “That’s what companies are spending their capital on, so that’s where we want to be positioned.”
In the near term, says Haworth, investors are increasingly focused on technology stock valuations. “In the long run, these valuations look fine, but in the short run, we have questions to overcome.” Haworth points out such questions include, “How will global tariffs, if implemented, affect the environment and what should AI development costs be in light of the new information that emerged with DeepSeek?”
Haworth says even if current technology stock valuations cause investors to pause, he believes it could create an opportunity to rebuild technology stock positions in companies that are poised for the most attractive long-term growth.
Investors have long been drawn to the tech sector’s innovative nature. “Fast is getting faster, and speed, scale and efficiencies across the board don’t happen without technology,” notes Terry Sandven, chief equity strategist with U.S. Bank Asset Management. “To a large degree, technology is impacting all sectors of the economy in all walks of life.” Over the past decade, the Communications Services and Information Technology index, while experiencing some volatility, has regularly outperformed the broader S&P 500 index.1
“Technology companies offer the potential for strong earnings growth that’s not specifically connected to the business cycle,” says Haworth. “Most of the performance we see is driven by secular, rapid business growth.”
Information technology stocks currently represent the largest sector of the benchmark S&P 500 Index, comprising more than 32% of the index’s value. When you add in communications services stocks, many of which connect with the technology arena, the group represents nearly 42% of the S&P 500.2
Five of the top seven stocks in the S&P 500 index (Microsoft, Nvidia, Apple, Alphabet (2 classes), and Meta Platforms) are in the information technology and communication services sectors. Those listings alone represent 26.5% of the S&P 500’s market capitalization.3 Many are connected to AI, and corporate AI spending remains significant.
“What’s not clear yet is how companies investing in AI as a way to increase efficiencies or monetize services for end users will benefit from these advancements,” says Haworth. “We’re in a consolidation phase to figure out what revenue growth will be going forward.” He adds, “If AI helps boost productivity, that will support not only corporate earnings and current rising stock valuations, but individual prosperity as well.”
The track record for tech stocks, particularly in recent years, is historically impressive. A hypothetical $100,000 invested in the S&P 500 Communications Services and Information Technology index on December 31, 2018, grew to a value of more than $391,000 by mid-December 2024. That far surpasses the accumulated value of the same amount invested in the S&P 500 over the same period.
In assessing the valuations of tech stocks, Haworth sees encouraging signs. “Investors still see upside potential for technology stocks because much of their price growth is supported by actual earnings. It’s not just speculation that the future is going to be increasingly profitable,” says Haworth. “Today’s environment is in contrast to previous historical periods where price bubbles developed, unsupported by underlying earnings.” Nevertheless, he notes that technology stocks tend to be subject to greater price fluctuation than the rest of the market. “With today’s elevated valuations, there is some risk, but also potential opportunities for future growth.” Haworth expects technology stock dominance of the stock market to gradually level off. “Over time, we should see more beneficiaries in the global economy beyond technology names.”
Although the technology sector is always subject to short-term volatility, Sandven remains optimistic about the sector’s long-term potential. “Companies are looking to get bigger, faster and stronger. They’re not doing that through hiring more people. They’re doing that through technology spending.”
Haworth also remains optimistic about technology stocks’ direction. Nevertheless, he notes that investors need to be selective in their approach to this sector. While some technology startups achieve tremendous success, many firms fail to get off the ground.
As you assess the most effective ways to position your portfolio consistent with your goals and time horizon, be sure to consult with your financial professional.
The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. It is an unmanaged index and direct investment in the index is not possible.
Technology stocks represent companies that primarily engage in businesses relating to current and emerging technologies. They can range from computer hardware and software firms to internet companies to medical device companies, along with many other industries with technology at their core. Technology firms make up many of the largest stocks in today’s market.
For much of the 2010s through 2021, technology stocks appeared to benefit, in part, from a favorable environment featuring low interest rates and significant market liquidity. That supported investments in growth stocks where investors focus less on current earnings and more on potential future earnings. In 2022, as inflation and interest rates moved higher, tech stocks suffered a significant correction, generally performing worse than the broad stock market. However, in 2023 and 2024, with interest rates still high, investors demonstrated greater interest in technology stocks, particularly among companies associated with emerging artificial intelligence (AI) advancements.
Except for a brief period of underperformance in 2024’s third quarter, technology stocks mostly managed to maintain the momentum generated during their spectacular 2023 performance. However, many technology-oriented stocks carry high valuations. Investors should carefully assess whether a tech stock under consideration is considered “expensive” from a valuation perspective. Tech stocks may not necessarily offer the most attractive values in today’s market, but for companies that can continue to generate revenue and earnings growth, technology stocks may continue to offer upside potential. Be sure to consult with your financial professional.
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