Will tech stocks continue to deliver A*s?

There are many important questions to answer as we navigate 2025. While many are spending vast amounts of time pondering what President Trump’s second term will mean for both the US and the rest of the world, I believe there is another question that may prove even more important in determining the relative performance of regional stocks this year. That is, will US mega cap tech stocks live up to expectations?

It’s common knowledge that a handful of companies have delivered the bulk of S&P 500 returns over the past couple of years. Since the start of 2023, 39% pts of the 53% gain?in the S&P Index is thanks to just seven stocks, known collectively as the Magnificent 7 [Footnote 1].

The valuation of these companies has helped pushed the overall benchmark valuation to levels well above historical norms.

The last time we saw such a phenomenon was during the late 1990s tech excitement, which we know did not end well. At that time, tech stocks were not able to live up to earnings expectations and prices of these stocks fell significantly, with some companies not surviving at all. Hindsight showed that it was a bubble which eventually burst.

The situation is different today. Many of these companies have in recent years delivered fantastic earnings growth which has propelled their stock prices higher. In the 1990s, it was generally the hope of future earnings rather than the actual reality of earnings today.

However, we shouldn’t be complacent and as we enter the tech earnings season for Q424, the Magnificent 7 will once again come under the microscope. In my view, these tech companies now have what I call ‘A* student syndrome’.

I remember when I was young, doing well in my first test and taking home a certificate with my first A*. My family were delighted – we all went out to dinner to celebrate. The following month I brought home another A* and was again met with much jubilation from my parents, though no evening out. A year later my A*s were being met with a well done, but considerably less fanfare. However, one day on a particularly tough test, I took home a simple A – no star. While still encouraging, my parents were somewhat concerned about what had gone wrong.

This is the problem these tech stocks now face. They have been delivering A*s but the market expects them to continue to do so. The following chart shows just how high earnings expectations have climbed in recent years. Delivering an A this year might be met with as much disappointment as my A was, all those years ago.

History suggests this is the stage of a tech cycle when the exams get harder. Having established the innovation, companies now need to demonstrate they can sell the product and monetise the considerable capital investment they have made in recent years. If geopolitical risk makes companies hesitant to deploy big capex programmes and invest in AI in the short term, this particular test could be challenging.?

Although I am generally optimistic about AI’s medium-term impact on the global economy and corporate profitability, it seems sensible to me to reduce the degree of overweight to these tech stocks. Such an overweight may have arisen in a portfolio simply by not rebalancing. The ten largest companies accounted for 20% of the S&P benchmark at the start of 2010 but now account for close to 40% [Footnote 2].? A degree of rebalancing, either within the US market or globally, might make sense because, as it did with me, the A* streak can ebb for a while.?

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Footnote 1 - ?FactSet, IBES, LSEG Datastream, S&P Global, J.P. Morgan Asset Management. Data as of 31 December 2024

Footnote 2 - LSEG Datastream, S&P Global, J.P. Morgan Asset Management. Data as of 31 December 2024.

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