The technology sector exchange-traded fund XLK is trying to make a comeback from losses earlier this week after the latest AI model from Chinese-owned DeepSeek sent chip stocks plunging. But a mixed start to the Big Tech earnings is keeping XLK from recording a rebound.
Allspring Global Investments Senior Portfolio Manager and Head of Capital Allocation Margie Patel offered his views on the tech sector outlook as the earnings season progresses, as quoted on Yahoo Finance.
Patel expected 2025 to "be a year of deceleration in growth" for tech, adding that there is still "uncertainty" regarding DeepSeek's impact. Some big tech companies have indicated a shift in spending strategy.
Microsoft CFO Amy Hood stated that capital expenditures in the current and next quarter would remain around $22.6 billion. While investments will continue into fiscal 2026, spending growth is expected to slow compared to fiscal 2025.
Addressing valuation concerns in the tech sector, Patel indicated that Big Tech PE ratios (price-earnings) have experienced "erosion" in recent months as investors worry about slowing growth and negative capital expenditure impacts.
However, Patel remains optimistic, projecting 20% earnings growth for the sector in 2025, which would "justify" the current valuations. Meanwhile, Q4 earnings are expected to be above the year-earlier level for the tech sector, with the sector enjoying 14.9% earnings growth, per Earnings Trends issued on Jan. 22, 2025.
Despite doubts about spending, Microsoft and Meta executives argue that large-scale infrastructure investments are crucial for long-term AI dominance. Meta CEO Mark Zuckerberg indicated that "investing very heavily" in capital expenditure and infrastructure will be a strategic advantage over time, as quoted on Yahoo Finance. Microsoft CEO Satya Nadella pointed out that the company’s spending is necessary to overcome capacity constraints and meet surging AI demand.
While Microsoft has allocated $80 billion for AI this fiscal year and Meta plans to spend up to $65 billion, DeepSeek claims to have developed its AI model for just $6 million. However, U.S. executives and analysts note that DeepSeek’s figure probably reflected only computing costs, not total development expenses.
Wall Street is showing signs of impatience with high spending and a lack of immediate financial returns. Industry analysts warn that AI spending may be outpacing actual consumption, as quoted on Yahoo Finance.
Microsoft’s stock declined about 5% in extended trading after the company projected weaker-than-expected Azure cloud growth. Meta’s mixed performance — a strong Q4 but a lackluster sales forecast — also raised concerns about AI monetization.
Against this backdrop, one should keep a close watch on technology-based exchange-traded funds (ETFs) like Vanguard Information Technology ETF VGT, Technology Select Sector SPDR Fund XLK, VanEck Semiconductor ETF SMH, iShares U.S. Technology ETF IYW and Communication Services Select Sector SPDR Fund XLC.
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Technology Select Sector SPDR ETF (XLK): ETF Research Reports
VanEck Semiconductor ETF (SMH): ETF Research Reports
iShares U.S. Technology ETF (IYW): ETF Research Reports
Vanguard Information Technology ETF (VGT): ETF Research Reports
Communication Services Select Sector SPDR ETF (XLC): ETF Research Reports
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