Tech stocks face an enormous task to satisfy investors todayheadline

The year’s first month is over, and equity markets performed well.

Sure, equity markets had their ups and downs in January, but the S&P 500 advanced 2.7%, and, based on historical market returns dating back to 1928, that’s a good sign. When January is positive, the stock market tends to post positive full-year returns 80% of the time, with average full-year gains of 13.4%, according to Merrill Lynch.

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That’s encouraging, but questions about government policy on taxes, deregulation, tariffs and immigration, Fed policy, and inflation could mean full-year equity market returns may be a bit more muted in 2025 than in the past two years. 

Related: Nvidia stock faces fresh China concerns

That could be particularly true of technology stocks, which have led the stock market’s gains and contributed to a flood of inflows into related stocks, mutual funds, and exchange-traded funds.

AI-driven technology stock rally fuels S&P 500

There is significant positive momentum behind AI. However, questions surrounding the surprisingly successful launch of the Chinese AI model DeepSeek have created uncertainty about the level of tech spending on AI in the months and years ahead.

Related: Analysts rework Amazon stock price targets after Q4 earnings surprise

Over the past several years, U.S. technology and large-cap growth stocks have been the market leaders. For example, looking back over the past 10 years, U.S. growth has significantly outperformed U.S. value, the U.S. has dramatically outperformed foreign markets, and the market-cap-weighted S&P 500 has clearly beaten the equal-weighted S&P 500.

However, this past month, the tables were turned. In January 2025, the Russell 1000 value index outperformed the Russell 1000 growth index; the EAFE Index (foreign developed markets outside the U.S.) outperformed the U.S. S&P 500 Index; and the equal-weighted S&P 500 market index beat the market-cap-weighted S&P 500 index.

This shift (along with the reason large-cap U.S. growth stocks have done so well over the past ten-plus years) is because technology represents about 31% of the S&P 500 market cap index. It represents just 6% of the EAFE Index and 14% of the S&P 500 equal-weighted index.

In short, as tech goes, so goes the market.

Technology stocks see massive inflows from investors

In recent months, money has continued to pour into U.S. technology-related investments. 

Related: Veteran analyst who predicted Palantir rally reset stock price target after earnings

For example, over the past 5 weeks, $6.5 billion flowed into technology investments versus just $2.7 billion for financials (the sector with the second highest fund flows) as of Jan. 30, according to Merrill Lynch. 

Those inflows have driven the rally in technology stocks, and widespread spending on AI infrastructure has supported much of the interest in the sector.

The Mag 7 stocks (Alphabet  (GOOGL) , Amazon  (AMZN) , Apple  (AAPL) , Meta Platforms  (META) , Microsoft  (MSFT) , NVIDIA  (NVDA) , and Tesla  (TSLA) ) make up about 31% of the S&P 500’s market capitalization. They’ve basically doubled their capital expenditures, or capex, over the last four years.

In 2024, their capex increased by 40%, while capex for the rest of the market increased by just 3.5%, according to Societe Generale. Based on recent comments from a number of Mag 7 companies that have reported results, capex spending is going to continue to increase in 2025:

• Google is forecast to spend $75 billion in capex this year (versus $52.5 billion in 2024, 
• Meta is forecast to spend $60-$65 billion in capex this year (versus $37.3 Billion in 2024).  
• Microsoft is forecast to spend around $80 billion in capex (versus $55.6 billion in 2025) and
• Amazon is forecast to spend around $105 billion in capex this year (versus $83 billion in 2024).

Merrill Lynch says the 4 largest hyper-scalers (Amazon, Google, Meta, and Microsoft) spent $216 billion in capex in 2024 (up 46% year over year) versus the rest of the S&P 500, which spent $817 billion (down 3% year over year).

Looking ahead, Merrill Lynch forecasts that the Big 4 will spend $262 billion in 2025 (up 21% year over year), while the rest of the S&P 500 will spend $876 billion (up 7% year over year). In 2026, the Big 4 are forecast to spend $283 billion (up 8%), while the rest of the S&P 500 will spend $886 billion (up 1%).

These are enormous sums of money. And, as a result, a debate has erupted over the level of capex expenditures and the risk of potentially spending too much on AI, given DeepSeek was reportedly constructed for under $6 million.

Technology sector profit growth is critical 

The spending has created a sector-wide domino effect. Remove it, and it’s anyone’s guess what happens.

More Tech Stocks:

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• Apple’s AI strategy could be saved by an unexpected source

One thing is certain: technology stocks must keep proving that investments are paying off for spending to continue at this pace. 

So far, this earnings season looks good, given technology stocks are beating EPS estimates by 1.5%, trailing only the financial, communication services, and consumer discretionary sectors.

The S&P 500 technology sector is currently forecast to post the highest EPS growth rate of all 11 GICS sectors this year and next year, growing by 22.3% in 2025 and 16.9% in 2026, according to FactSet.

That’s all fine and good, but with valuations historically on the higher side, there is less margin for error should technology profit growth fail to live up to expectations. 

Overall, the wind has been at the back of U.S. technology and large-cap growth stocks for good reason. However, whether technology stocks remain market leaders will likely depend on what happens from here on corporate profits and capex trends.

Related: Veteran fund manager issues dire S&P 500 warning for 2025