Key Takeaways
- The US technology sector experienced a collapse in the first quarter of 2025, but rebounded in April after the introduction of sweeping trade policy changes.
- Hardware and semis stocks have been strong throughout the year, while software has lagged, but is expected to offer the most upside.
- Generative AI remains a major theme in the sector, with software firms developing and incorporating next-generation AI capabilities into their solutions.
- Quantum computing is an emerging area that is likely to have a profound impact on the compute function, with a potential market size of $200 billion annually at maturity.
- Top technology sector picks include Broadcom, Microsoft, and NXP Semiconductors, which are expected to benefit from secular tailwinds such as cloud computing, artificial intelligence, and the expansion of semiconductor demand.
Introduction to the Technology Sector
The US technology sector experienced a significant collapse in the first quarter of 2025, but began to rebound in April after the Trump administration introduced sweeping trade policy changes, including the heavy use of tariffs. Despite the initial downturn, the sector has shown resilience, with hardware and semis stocks performing strongly throughout the year, while software has lagged. However, software is expected to offer the most upside, driven by secular tailwinds such as cloud computing, artificial intelligence, and the long-term expansion of semiconductor demand. The Morningstar US Technology Index has outperformed the market by over 800 basis points over the past 12 months, with a trailing 12-month return of 21.43% compared to the US equity market’s return of 17.35%.
Generative AI and its Impact on the Sector
Generative AI remains the largest theme in the sector, with software firms developing and incorporating next-generation AI capabilities into their solutions. Cloud providers are introducing new services and scaling capacity, while some semiconductor firms, such as Nvidia, are experiencing surging demand for AI and data center chip applications. However, it’s challenging to find attractive value in AI, as many names have oscillated wildly in 2025. Despite this, the potential for AI to drive growth and innovation in the sector remains significant, and companies that are well-positioned to capitalize on this trend are likely to benefit.
Emerging Trends: Quantum Computing
Quantum computing is an emerging area that is likely to have a profound impact on the compute function, offering potential performance advantages over traditional computers. The market for quantum computing is expected to reach $200 billion annually at maturity, which could be up to 30 years from now. This growth will be driven by fundamental performance advantages, new use cases for problems that cannot be addressed by computers today, and mass market adoption. Quantum computers are likely to be consolidated into existing cloud provider services, providing a new revenue stream for companies that are well-positioned in this space.
Top Technology Sector Picks
Several companies are well-positioned to benefit from the trends and themes discussed above. Broadcom is one of the top picks in semis, with a leadership position in AI chips and strong demand expected over the medium term. Microsoft is a top pick in software, with a dominant position in several markets, including Office and Windows, and a strong investment in OpenAI. NXP Semiconductors is another top pick in semis, with a well-diversified portfolio of processors, microcontrollers, and analog parts, and a strong position in the automotive sector. These companies have attractive valuations and are expected to benefit from secular tailwinds, making them compelling investment opportunities.
Valuation and Outlook
The median US tech stock is undervalued, with an attractive margin of safety. Hardware and semiconductors are considered fairly valued, while software is meaningfully undervalued. The sector is expected to continue to benefit from secular tailwinds, including cloud computing, artificial intelligence, and the expansion of semiconductor demand. As the sector continues to evolve and grow, companies that are well-positioned to capitalize on these trends are likely to outperform, making the technology sector an attractive investment opportunity. Overall, the outlook for the technology sector is positive, with significant potential for growth and innovation in the years to come.