The year began with concerns about valuation and a shift to less expensive stocks, yet technology has resumed its leadership, CIO explains why
The tech rally was supposed to be in some kind of a correction this year. After running up massive returns and rising to huge valuations and p/e multiples well above 20x, the small number of technology names in the ‘magnificent seven’ began the year as underperformers. Investors in US equities were preferring value stocks, a broader-based exposure, and equal weight indices. Since the market correction induced by ‘liberation day’ tariffs announced in April, and the recovery that followed, US technology stocks have been leading domestic performance once again. Leaving investors asking why?
Elliot Johnson, Chief Investment Officer and Chief Operating Officer at Evolve ETFs, explains that a confluence of factors are driving this latest round of tech performance. He highlights investor behaviour, the US macro environment, the role of the Trump administration, and the potential impacts of AI as all playing into the valuation of leading tech companies.
“The thing that people are afraid of is not buying more of a technological sea change,” Johnson says. “Every time there’s been a major technological innovation, the PC, then the web, then mobile, these giant companies have been there every time, winning. These are the companies that have the R&D budgets to truly move the ball forward… The battle right now within tech is over who has the best AI.”
Johnson notes that the magnificent seven currently account for around 47 per cent of the R&D budget of the whole S&P 500. There are new initiatives from companies to pour billions into AI infrastructure, data centres, and energy. There are government incentives that make R&D investment more appealing, as well as deregulation initiatives aimed at increasing energy production.
Beyond just the investments being made that Johnson argues justifies some of the tech valuations on the market now, he notes that the Trump administration’s pro-business stances have encouraged investors to preference these names. The risks associated with tariffs, conversely, are largely being discounted by investors. At the same time, investors are beginning to price in a more accommodative Federal reserve, noting that falling interest rates tend to be good for growth equities. Even if that results in more inflation, Johnson highlights the traditional strength of growth equities during inflationary periods.
The final area that Johnson sees driving US tech stock valuations is investor behaviour. As investors’ risk appetites returned following liberation day, they piled into US tech almost by default. The US tech sector is up roughly 48 per cent since April 8th, while the broader S&P 500 is up around 27 per cent over the same period. Johnson argues that some of this rise is due to investors reverting to what has always worked for them, and what has and continues to work for them is to be overweight tech stocks.
“It's perfectly logical. Is this where deep value is? Not necessarily. But, it's been the wrong call to not be overweight tech for a really, really long time,” Johnson says.
One of the criticisms levelled at companies building out AI software, like Microsoft, Apple, Meta and Google, is that they are not yet monetizing their investments in AI. Johnson argues, however, that investors are currently flipping that logic. Right now companies in this cohort are being punished for a lack of a strong AI platform. Apple, for example, has struggled with its AI rollouts and certain promised features have not been delivered. Investors have been less kind to that firm as a result. Johnson argues that investors tend to have a great deal of patience for longer R&D processes when they can expect the outcome to be truly transformative.
“I do think at some point you you're going to see a demand for show me the money. I would point out that investors have high tolerance for long R and D projects that don't show something,” Johnson says. “What I think is going to be the unlock for AI in the next kind of few years is going to be more truly an assistant. I think again, Microsoft is just so well positioned here. Why can't my Outlook read all my email and understand it and maintain memory of all of it? I could sit down and ask it a question and it could come back with a clear summary and follow up items. At that point it could be a complete game changer.”
