Information technology sector
All about AI, these companies have been powering the AI revolution.
- The tech sector posted strong performance in 2024, on standout results from the chips companies helping to build the infrastructure for artificial intelligence (AI).
- The outlook for the sector in 2025 and beyond may be bright, as tech companies continue to innovate and digitization and automation become increasingly important in our lives.
- I believe we are still in the "picks and shovels" phase of generative AI, which has favored certain semiconductor and hardware companies that support the AI infrastructure needed for the foundational models.
- However, I believe the next phase of development could present opportunities for software firms, as the application layer begins to roll out generative AI agents across end markets, and as the full benefits of AI begin to be realized.
Tech stocks had another spectacular year in 2024—the sector’s second-straight year of market-leading returns.
For 2025 and beyond, I believe the sector is still well positioned. Tech has continued to be the source of the most exciting advances in how we work and live. The impacts of generative AI may be unfolding for many years to come, as may the increased digitization and automation of our lives—all of which could continue to drive results for the semiconductor makers, software makers, and other companies that populate this sector.
2024: Fueled by strong results
The tech sector benefited in 2024 from standout results in the semiconductor industry, reflecting major corporate investments in AI infrastructure. While the sector took a breather in the second half of the year amid high valuations and questions about the timeline for AI development, as of mid-December tech was still one of the top-performing sectors for the year.
Past performance is no guarantee of future results. Technology sector performance is represented by the S&P Technology Select Sector index. Data as of December 9, 2024. Source: S&P Dow Jones Indices, a division of S&P Global.
2025: Compelling near-term dynamics for semiconductors
Although some semiconductor stocks have been at the forefront of the tech sector’s big gains in recent years, the chip industry has actually been bifurcated over this period. The stocks of companies linked to AI have enjoyed surging fundamentals. But those that serve more broad-based end markets—like autos, industrial products, communications infrastructure, and consumer electronics—have actually lagged, in many cases, due to severe oversupply problems.
I believe there could be attractive potential in the year ahead for these “non-AI-winner” chip makers. The broader semiconductor industry is more than 2 years into an inventory correction. After the pandemic initially caused dramatic shortages for semiconductors, the industry responded by ramping up production—leading to one of the worst oversupply conditions in decades.
However, I believe these oversupply dynamics are likely to prove temporary and could be poised to resolve soon. One catalyst for this could be a coming AI-driven product-upgrade cycle, as AI adoption begins to reach across all technology devices and end markets. Any lift to the general economic environment, perhaps aided by lower interest rates, could help as well.
I believe several chipmakers could see an impact from such tailwinds. Chip companies that support the manufacture of power inverters for electric vehicles, driver-assistance systems, such as cameras, sensors, and radar, are likely to see an impact. Suppliers of semiconductors for a variety of automobile functions, including radar for driver assistance and other solutions powering the next generation of auto architectures have also been well positioned to capitalize on rising electronic content in autos that make cars more and more like “smartphones on wheels.” This increasing electronic content could enable chip sales to auto companies to strongly outpace overall auto sales growth in the coming years.
2025 and beyond: Massive AI spending driving potential opportunities
While it’s important not to overlook such non-AI beneficiaries, AI is still squarely at the center of the industry’s near- and long-term outlook.
AI spending continued at a rapid pace in 2024, dominating capital budgets for many companies. Tied up in the AI spend has been the simultaneous move to “accelerated computing,” in which the most data-intensive tasks run on specialized hardware. The biggest spenders were the large cloud-services providers, but also major companies in the communication services and consumer discretionary sectors.
Much of this spending spree accrued to infrastructure firms—the providers of the graphics processing units, high-speed memory, and other “picks and shovels” that enable the high-speed computing required to develop and operate generative AI applications. For example, graphics chipmaker Nvidia has, in my opinion, offered the purest way to gain exposure to generative AI. The company has been investing in AI for about a decade, and its end-to-end solutions of chips, software, and systems have positioned it extremely well as the provider of choice for “hyperscalers,” or large cloud-services providers, and enterprises looking to embrace generative AI.
There’s only been modest benefit, so far, to companies that employ AI in their software suites. But I look for more developments like this in 2025 and beyond. Over time, the benefits of AI adoption may shift from semiconductors and hardware toward software providers, as adoption of generative AI moves past the infrastructure phase. This kind of shift would mirror trends that played out during the development of the internet several decades ago.
Companies with cloud-based, AI-driven platforms for streamlining and automating routine tasks in enterprises and free, AI-enabled features exemplify this thesis. The software can provide contextually relevant support for a range of tasks including marketing, customer support, and back-office management.
Exciting prospects for the future
As the advent of generative AI has shown, the tech sector has been a seemingly limitless fount of innovation for our everyday lives, from PCs to smartphones, to EVs, and more. There is already evidence of AI-driven gains in productivity, customer service, coding, graphic design, and translation services, and I believe AI could eventually be disruptive to the way most work is performed. Progress may not be linear, though, and investors must be mindful of stock valuations and the timing and potential impact of further technological advances in the field, as well as the broader macroeconomic environment.
This is an exciting time for the tech sector, and I look forward to continuing to monitor developments and innovations through 2025 and beyond.
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