On Wednesday, Bernstein outlined its Technology strategy for 2025, reflecting on the sector's performance in the past year.
The tech sector saw a 30% appreciation in 2024, continuing its strong performance from 2023 when it rose by 55%. This growth outpaced the broader top 1500 companies by a significant margin of 1000 basis points (bps) on a capitalization-weighted basis. However, the sector's progress was narrowly driven, with Nvidia (NASDAQ:NVDA) being the primary contributor to the tech sector's outperformance during the year.
Despite the overall sector's robust gains, the performance varied when looking at different weighting methods and company sizes. From July 1 to December 31, tech's performance aligned with the broader market, and on an equally weighted basis, it slightly underperformed by 110 bps throughout the year. Notably, only 29% of technology stocks exceeded market performance in 2024, marking one of the lowest figures in over two decades. Additionally, the trend of growth and expensive stocks outshining value and inexpensive ones within the tech sector persisted for the second year in a row.
Currently, the tech sector is trading at a 40% premium compared to the market average, down from its recent peaks but still above the historical average premium of 26%. On a forward earnings basis, capitalization-weighted tech stocks are valued at 30 times earnings.
Bernstein's analysis suggests that the tech sector merits a higher valuation than in the past, citing factors such as recurring revenues and strong free cash flow. Semiconductor companies, particularly Nvidia, have been central to the sector's financial strength, contributing significantly to earnings revisions and anticipated earnings growth for 2025.
Bernstein recommends a market-weight stance on tech stocks as 2025 commences, with a slight inclination towards positivity. The firm anticipates that tech's relative performance in 2025 will largely depend on developments and perceptions surrounding artificial intelligence (AI) and Nvidia's progress.
While tech valuations have decreased from their 2023 peaks and earnings growth appears robust in the short to medium term, there are concerns about a potential deceleration in AI infrastructure expansion and the high expectations for earnings growth entering 2025.
Investors are advised to consider a shift towards value-oriented, small and mid-cap (SMID) tech stocks, which are seen as having attractive valuations and potential for earnings recovery.
This advice comes after a year where there was a notable pivot to more expensive, growth-focused tech stocks and where smaller and mid-cap stocks did not perform as well financially or in stock market performance. Select large-cap tech companies also present attractive valuations relative to their historical figures, according to Bernstein's analysis.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.