Technology was the market's darling in the second quarter, helping the S&P 500 generate a nearly 10% return through the first half of the year. The next stretch is looking tougher. While we wouldn't abandon tech, there may be better values and sector performance elsewhere for the second half.
Fueled by AI enthusiasm and momentum in memory-chip stocks like Micron Technology, the technology sector surged a record 43% in the second-quarter, according to Dow Jones Market Data. The gains helped the sector finish the first six months up 32%.
Among all sectors in the S&p 500, Energy and industrials tied for second place, gaining around 20% each in the first half.
There's precedent for tech to keep rallying. The sector rose 11.7% in the third quarter of 2020 following a 30% surge in the second quarter as the brief Covid-induced bear market came to an end.
But cracks are emerging. The memory-chip rally didn't extend to other mega-cap semiconductor stocks, notably Nvidia and Broadcom, both up less than 7% year-to-date. The iShares Expanded Tech-Software Sector ETF is down nearly 15% in 2026.
Meta Platforms, despite a 10% bump on Wednesday, is still down 6% through the first six months. Apple has been laggard. And software remains weak; the iShares Expanded Tech-Software Sector ETF is down 14% this year.
Tech always carries an elevated multiple, but after such a big run the sector is looking more vulnerable to a pullback. The State Street Technology Select Sector SPDR ETF trades at 26 times earnings estimates for this year, against a market multiple of 22 times. Earnings estimates will have to keep rising for tech's multiple to hold.
Tech will also have do its part for the rest of the market. Estimates for the second quarter have been rising, which is a good sign. And analysts have been boosting estimates for the second half with tech expected to deliver 58% earnings growth in the third quarter and 48% in the fourth, according to consensus forecasts.
Those figures would be better than every other sector except for energy, coming off depressed earnings when oil prices were lower. Overall, earnings for the S&P 500 are expected to rise 27% in the third quarter and 24.6% in the fourth quarter.
"The bedrock to the entire year is profits, profits, profits. And they continue to surprise significantly. Margins are coming in better than expected," said Chris Hyzy, chief investment officer for Merrill and Bank of America Private Bank, in an interview with Barron's.
Tech's next big test is second-quarter earnings. Results from chip stocks and companies such as Alphabet, Amazon, and Microsoft will be critical, notes David Fetherstonhaugh, an investment strategist at VistaShares.
"We got a taste of strong earnings with Micron Technology," he says. "We need to see if that plays forward with other chip names like Taiwan Semiconductor and ASML Holding as well as the hyperscalers."
Valuations are stretched in other sectors with AI tailwinds, but they include more companies benefitting from broader economic trends and global growth drivers.
The State Street Industrial Select Sector SPDR ETF, for instance, has Caterpillar and GE Vernova as top holdings. The companies are benefitting from surging AI power demand and infrastructure spending, and they're a big reason why the ETF trades at 28 times earnings. But the ETF includes companies involved in railroads, construction, aviation, and other industrial areas, providing diversification and cover if the AI names falter.
Other sectors looking relatively cheap include financials, communication services, and healthcare. All should benefit from a stable economic backdrop. Those sectors trade between 16 and 20 times estimated 2026 earnings.
Energy, for its part, got off to a tremendous start after the war with Iran sent crude prices soaring, but the sector slid 13% in the second quarter as oil prices tanked.
The stocks now offer high yields around 4% for big names Exxon Mobil and Chevron. And the sector is back in value territory at 12 times estimated 2026 earnings. The sector is still ahead 18.5% this year.
Falling crude prices could knock it down further, but there's upside if hostilities pick up again in the Middle East.
Write to Paul R. La Monica at paul.lamonica@barrons.com
Write to Paul R. La Monica at paul.lamonica@barrons.com
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(END) Dow Jones Newswires
July 01, 2026 14:05 ET (18:05 GMT)
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