By Martin Baccardax
Investors may be willing to cling to a faint hope that an end to the U.S. war with Iran -- which is about to enter its second month -- is within sight, even if the path remains uncertain.
Stocks are poised for a strong end-of-quarter rebound on Tuesday, even as domestic oil prices trade firmly north of the $100 a barrel mark, and gas tops $4 a gallon for the first time in four years.
But what they still lack is a sustained rebound in tech stocks -- the bellwether sector that has powered the S&P 500 throughout the bull market that began in late 2022. That absence may prove even more important than higher-for-longer crude prices.
An index of the so-called Magnificent Seven tech giants remains nearly 17% below the all-time highs it reached in late October and is at risk of slipping into bear-market territory in the coming weeks.
Microsoft, briefly the world's most valuable stock in January last year, has fallen nearly 33% over the same period, while Meta Platforms has shed more than 26%.
Even Nvidia, the undisputed champion of artificial intelligence chipmaking and the beating heart of the broader AI boom, has slumped 18% since the tech trade turned sour last autumn.
But they've also rarely looked cheaper.
The basket is trading at a forward P/E multiple of 21.5, a mere 5% premium to the current S&P 500 valuation of 20.5 -- remarkably narrow for a group that accounts for roughly one-third of the index's total market value.
The gap between tech sector and S&P 500 multiples, in fact, is the narrowest since 2015.
Still, building a rally for the S&P 500 without those names -- which alone carry more than double the weight of the entire energy sector -- is simply not possible.
And for that to happen, the AI trade needs a reboot.
James Reilly, senior markets economist at Capital Economics, thinks that may come soon.
"We don't think [the U.S. war with Iran] undermines the broader AI thesis," Reilly said. "Our baseline assumption is that the AI buildout will not be meaningfully impacted, and for the most part investors don't seem to be factoring in much of a change to the outlook for tech stocks."
Reilly added that while price action in the sector is undoubtedly negative, it should be viewed through the lens of higher Treasury bond yields, which have compressed valuations even as earnings expectations have improved.
"Clearly, a prolonged conflict -- and the potential for a U.S. recession -- would eventually take a toll on the earnings outlook for tech stocks, " he said.
"But if our baseline assumption of a conclusion to the war around end-April and limited long-lasting damage to major infrastructure were to materialize, we think the conditions would be in place for the AI story to resume its place as the key driver of global equities," he added.
Jeffrey Buchbinder, chief equity strategist at LPL Financial, agrees -- and suggests that the megacap tech cohort is likely to deliver a first-quarter earnings growth more than double that of the other 493 stocks in the S&P 500.
"Based on current estimates, about 80% of the earnings growth for the S&P 500 over the first quarter is expected to be driven by the technology sector, while the Mag 7 alone is estimated to generate nearly half," he said. "AI Investment isn't going anywhere."
Still, the sharp swings seen in other corners of the tech sector are starting to become more frequent. That suggests heightened volatility into next month's earnings season and could put a cap on fresh capital flowing into the space.
Memory chip makers, for example, which were star performers for much of the first quarter, have been crushed over the past two weeks following a report that Google parent Alphabet's new Turboquant algorithm can significantly reduce search needs.
The selloff, which echoes the wholesale repricing of the software sector earlier this year, has wiped billions from the iShares Semiconductor ETF, and dragged big names such as Micron Technology and SanDisk Corp into deep bear-market slumps.
"Investors are now left questioning if memory's intense sell-off is just another buying opportunity -- like it proved to be during the DeepSeek moment of last year and the Citrini Research declines of this year -- or if this is a narrative shift away from the picks and shovels of AI," said Fundstrat's economic strategist Hardika Singh.
For now, the AI trade will need all of its components firing to support a broader S&P 500 rally in the coming quarter. The valuations are compelling -- but conviction remains the missing piece.
Write to Martin Baccardax at martin.baccardax@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
March 31, 2026 16:10 ET (20:10 GMT)
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