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Thought of the day

US tech stocks ended the first half of 2025 on a strong note, with the Nasdaq at a record high after rebounding over 33% sin ce its post-“Liberation Day” low in early April. Valuations have also returned to near last year’s high, raising investor concerns over the sustainability of the rally, when margins are set to moderate amid strong investment commitments.

The structural outperformance of tech stocks versus the broader market over the past two decades has partly been due to the sector’s strong margins. But the significant upfront investments required in artificial intelligence (AI) compute and related infrastructure mean that tech companies’ near-term margins are likely to come under pressure. The capex intensity (capex divided by revenues) of the Big Four tech firms has increased from 11.5% in 2020 to nearly 21% in 2025, and we estimate it will stay elevated at around 22% through to 2030.

But while we continue to expect near-term volatility amid macro uncertainty, we believe any moderation in tech margins will be temporary, and that encouraging AI monetization trends should underpin the sector’s growth trajectory.

Efficiency gains brought by AI will be supportive of margins down the line. While we expect a dip in big tech’s margins this year and next, we believe they should recover in the years to come as AI automation drives other operating costs lower in the longer term. Tech companies have already highlighted how AI has automated key tasks like coding, content generation, office productivity, and marketing, so we expect the majority of operating costs to increase at a slower pace than total revenue growth over the next five years. Accelerating automation or stronger monetization could see a faster margin recovery amid efficiency gains.

Monetization trends have been encouraging amid rising AI adoption. The latest US Census Bureau survey showed that AI adoption across 1.2 million firms in the US has risen further in the June quarter, with some industries reporting adoption rates of 25-30%. As more tangible use cases gather pace across industries, we believe overall AI adoption will continue to rise, driving further monetization for software and internet companies. Oracle, for example, has recently signed a single cloud deal worth USD 30bn in annual revenue, more than the current size of its entire cloud infrastructure business.

Lower interest rates and a weaker US dollar should offer tailwinds. We expect the Federal Reserve to resume policy easing later this year as US economic activity slows. With 100 basis points of rate cuts expected over the next 12 months, US dollar weakness is likely to persist. Such a backdrop should be supportive for tech stocks, as overseas sales account for over 50% of US tech companies’ revenue, while lower rates make future earnings more valuable when discounted back to the present. We expect global tech earnings to grow 12% this year.

So, while near-term risks remain, we believe the robust secular trend of AI will continue to drive the longer-term gains in the tech sector. We favor a balanced and diversified positioning across the AI value chain, and recommend investors consider structured strategies to navigate volatility ahead.