After rewarding select tech stocks for their AI infrastructure spending, investors are now asking if all that spending can be monetized
While the technology sector was a major outperformer through much of 2024, in the last six months of the year tech stocks began to underperform the broader US equity market on a capitalization weighted basis. In the first full week of 2025 we have seen that theme continue with various technology names beginning to pull back some of their historic gains from 2024 and 2023. All that despite strong continued growth numbers coming out of even the most highly valued technology stocks.
While a range of factors are at work in this technology pullback, James Learmonth, Senior Portfolio Manager at Harvest ETFs, explains that the Artificial Intelligence (AI) theme remains central to the performance of many big tech names. Where in 2023 and the first half of 2024 these ‘hyper scaling’ companies like Microsoft, Amazon, Alphabet, and Meta were rewarded for the amount they spent on AI infrastructure, now investors are asking them how they’re monetizing those investments and if the margins are worth the astronomical amounts of money spent on these investments.
“I think investors are now starting to grapple with the question of when these hyper scalers take a pause and start digesting all this spending to find out if they’re monetizing this to a degree that justifies the amount of spending,” Learmonth says. “I think that’s going to be an ongoing question as we go through 2025.”
Much has been made of the expensive valuations among some tech stocks, namely the ‘magnificent seven’ of Nvidia, Tesla, Alphabet, Amazon, Meta, Microsoft, and Apple. Learmonth notes, though, that these companies are still posting significant earnings growth. Expectations are that earnings per share growth remains between twenty and thirty per cent for these companies throughout 2025. Price to earnings multiples, while high, are not at some of the extreme valuations we’ve seen during past tech bubbles. Yet, tech is underperforming somewhat.
As investors assess tech companies and their monetization of the AI trend, Learmonth says they’re imposing tougher and tougher comps on these firms. The market is grappling with how much these companies are spending on AI and pushing for something of a pause, or at least earnings that justify the spend. Learmonth adds that this AI theme is already very well-owned, so the incremental buyer appears harder to come by.
“Will technology maintain its leadership position through 2025?,” Learmonth asks. “I’m not so sure, and that really comes from the fact that we saw this huge increase in earnings per share for these AI-focused named through 2023 and 2024.”
That said, after a few quarters facing a few of these tougher comps Learmonth expects the big AI-focused names can reaccelerate their growth once comps become a little easier and investors gain greater clarity on the monetization of AI.
Learmonth also sees potential for a broader subset of technology names to perform well. While expectations are high for hardware companies and the mega-cap hyper scalers, smaller software names have already started to pick up some tailwinds following underperformance in 2023 and 2024. Many of these companies like Intuit and Adobe have attractive valuations and some potential for upside.
Certain names in that category could possibly pick up a relief rally as markets digest the impacts of the AI theme. Adobe is one example, as the stock has suffered with the expectation that AI content generating tools pose an existential threat to their business. Despite that, the company’s earnings per share has continued to climb upwards, making the stock possibly more attractive to investors.
Learmonth notes that one company has been the test case in demonstrating AI monetization already: Palantir. The software firm for big data analytics has gone out of its way to demonstrate how its AI investments have already translated into earnings. They’ve shown that their traditional focus on government services has been widened into the corporate market through AI, and investors have responded relatively warmly.
As advisors look at a tech space facing tougher comps and a test to the AI theme, Learmonth continues to see value in tech stocks given their growth histories and ongoing scale. He believes that equal weight allocations to technology, given how skewed the cap-weighted indexes are now to a few massive names, could offer advisors an advantage. The nature of portfolio allocations, he argues, will be essential through the year.
“Diversification is key and I think that’s going to become increasingly apparent as we move through 2025,” Learmonth says. “There are a lot of known unknowns, like the new administration in the US, and I don’t think tech is necessarily going to be immune to that. Investors need to make sure they’re diversified across different areas of the market to make sure they’re able to participate and don’t get caught wrong-footed.”
