By Jacob Sonenshine
Tech shares have taken their share of whacks in the past few months. They're cheaper now -- and now's the time to buy.
The State Street Technology Select Sector SPDR Exchange-Traded Fund, which tracks the S&P 500's tech sector, is about flat since early October. Since then it has had wild swings, even falling 11% for one stretch of a few weeks.
A few factors are at play. First off, the market is afraid that a massive internet or software company will suddenly -- and dramatically -- slow the growth of its capital investments because of smaller returns on that spending.
Slashing spending growth would hurt chip stocks -- Nvidia, Advanced Micro Devices, Broadcom, and Micron Technology are the biggest names -- because less investment in AI data centers means lower chip demand, which could crush their expected sales, profit margins, and earnings.
Secondly, it was just time for many to take profits. Tech has been one of the best performers in the past five years, crushing the S&P 500. Faced with the risk of slower spending growth, investors were happy to reap their big gains.
The good news? Not one of risks has become a reality.
Sure, Oracle stock has plummeted 41% from its high because the market has its doubts about OpenAI's ability to pay Oracle for its services. It would be less of a worry if Oracle weren't borrowing gobs of money to finance its data-center spending.
But for now, the angst is about Oracle. No other Big Tech company has borrowed close to what Oracle has. And Microsoft, Amazon.com, and Alphabet have diversified customers bases for their AI software. They've signaled nothing about cutting their spending on data centers and chips.
Plus, tech is now cheaper. The sector trades at 25.5 times earnings that analysts expect for the coming 12 months, down from 30 times in October.
The current multiple is just over 3 points above the S&P 500's 22.4 times. The premium is deserved because of tech's ability to sustain high earnings growth over the long-term -- a trajectory based on AI demand that's in its early stages -- but it isn't a large one. When tech stocks fired on all cylinders in the past five years, the premium sometimes stretched to 9 points.
The multiple is smaller because stock prices have held steady, but expected earnings have increased. Aggregate tech earnings for this year, forecast by analysts, are up 10% since just before October, according to FactSet. The analysts have lifted sales estimates slightly because demand looks fine, and those revenue estimates have boosted their margin estimates.
Both software and chip estimates have risen, though the bulk of tech's increase has been driven by the chip industry. Analysts see no sign of waning demand for semiconductors, which provide the backbone for AI software.
The point is that tech stocks are cheaper, and if they meet or beat earnings estimates, the market will probably assume growth keeps going and higher profits bring the stocks higher.
Big Tech starts reporting earnings in late January. Right now, the sector's poor performance -- and drop in stock prices -- give investors an opportunity to buy.
Morgan Stanley's chief U.S. equity strategist, Mike Wilson, emphasizes that tech is becoming more attractive.
"Mag 7 [Nvidia, Tesla, Amazon, Alphabet, Apple, Meta, Microsoft] positioning has also lightened up despite a recent inflection in mega cap tech revenue revisions," writes Wilson.
So don't count tech out. Sure, non-tech stocks have outperformed tech in the past few months, but just wait. When tech earnings come out, expect these stocks to return to dominance.
Patience will pay off with juicy gains.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
January 07, 2026 13:10 ET (18:10 GMT)
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