The past month has seen the US technology sector rocket higher. After a lacklustre start to the year, the ‘Magnificent 7’ have gained roughly 13% since mid-April*. Strong earnings and signs that AI spending is translating into real profits have fuelled its strength, but the talk about a ‘bubble’ has started to get stronger.
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It was an astonishing earnings season for the US technology sector. Expectations had been high, but the technology giants still managed to smash them. The sector reported annual earnings growth of 50.7%**. The stand-out winner was the semiconductor sector, which has been one of the main beneficiaries of the $700 billion AI spending bonanza***. Companies in the sector saw their earnings increase by 99%**.
This has propelled share prices in the sector to new heights. Nvidia has risen 15% over the past month, Micron Technology is up 75%****. Amazon, Apple, Tesla and Alphabet have also been strong. Meta is the only notable laggard, with its share price wobbling over concerns on its AI strategy.
The recent strength seems to show that AI adoption and monetisation is proceeding at speed. Companies are being rewarded for their investments in AI and it appears that AI is allowing companies to cut costs and super-charge their profitability. It looks like it is back to the races for the technology sector.
For investors, the decision is whether those expectations are now in the price of shares. BlackRock chairman Larry Fink recently dismissed growing talk of a bubble, saying: “There is not an AI bubble. There is the opposite. We have supply shortages. Demand is growing faster than anyone has ever anticipated.”
Certainly, it is a bonanza moment for the AI infrastructure groups. Maneesh Bajaj, manager on the Brown Advisory US Flexible Equity fund, has been buying Nvidia for the fund: “Late last year, Anthropic released its Claude Opus 4.5 large-language-model and it became increasingly clear that AI may be approaching an inflection point in software development — enabling faster iteration, greater automation, and potentially lower costs.
“In our view, these capabilities could represent one of the more compelling applications of AI to date. We believe if adoption continues along this trajectory, AI-driven workloads are likely to support sustained growth in compute demand, benefiting the semiconductor ecosystem — particularly NVIDIA, given its leadership position.”
David Eiswert, manager on the T. Rowe Price Global Focused Growth Equity fund, agrees that the companies supplying the inputs for AI – memory, power, and infrastructure – are all in a good place. However, he is less sure about the position of the so-called ‘hyperscalers’ – Amazon, Microsoft, Alphabet, for example.
“The leading platforms are being drawn into a capital-intensive investment race as a major technological shift leaves incumbents little choice but to invest to maintain their position. In 2025 alone, the largest platforms raised over $100 billion in debt to fund that spending. Capital expenditure among the leading hyperscalers is rising at an extraordinary pace, absorbing a growing share of cash flow and, in some cases, pushing free cash flow generation toward zero or below.” His view is that while these platforms may ultimately capture value from AI, it is not certain.
Both fund managers believe that the most vulnerable area is software. The ‘moats’ that have allowed software groups to maintain high margins and strong growth are eroding. The Brown Advisory team has been selling down some software names, such as Workday. While the ‘SaaS-mageddon’ – which saw software companies sell off by around 25% from mid-January to mid-February^ – may have been overdone, some software groups are undoubtedly at risk from AI.
There is also the problem that the narrow focus on AI is leaving a lot of other sectors overlooked. The recent earnings season revealed a lot of other winners outside AI. 84% of companies reported earnings ahead of market expectations and only one sector (healthcare) reported a year-on-year decline in earnings**.
As Rajiv Jain, manager on the GQG Partners US Equity fund, says: “While the market’s centre of gravity has shifted towards one story (AI), valuations and index concentration have moved with it, widening the gap between what is “exciting” and what is simply essential. That is precisely when we prefer to own businesses whose returns are driven by durable cash flows rather than perfect expectations.”
The technology sector is exciting, but investors need to tread carefully. There are areas that are expensive, and where the long-term outlook is still uncertain. Equally, there are plenty of companies that have been overlooked in the rush to everything AI. There may be opportunities there too.
