Technology Stock Outlook: Secular Tailwinds Continue

The technology sector collapsed in the first quarter of 2025. Stocks began to rebound in April, after the Trump administration introduced sweeping trade policy changes, including the heavy use of tariffs. Hardware and semis stocks have been strong throughout the year, while software has lagged. Overall, technology was the second-strongest sector in the fourth quarter, reflecting a continued rebound from a weak first quarter, when it did second-worst. Over the past 12 months, the sector has outperformed the market by more than 800 basis points. Our confidence in secular tailwinds, such as cloud computing, artificial intelligence, and the long-term expansion of semiconductor demand, remains unchanged. Overall, we see software as offering the most upside.

Generative AI remains the largest theme in the sector. Software firms are developing and incorporating next-generation AI capabilities into their solutions, while cloud providers are introducing new services and scaling capacity, and some semiconductor firms, such as Nvidia, are experiencing surging demand for AI and data center chip applications. It’s hard to find attractive value in AI; many names oscillated wildly in 2025.

The Morningstar US Technology Index is up 21.43% on a trailing 12-month basis, compared with the US equity market up 17.35%. Over the past quarter, the U.S. equity market was up 2.43%, while tech was close to unchanged at 0.73%. The median US tech stock is undervalued, with an attractive margin of safety. We see hardware and semiconductors as fairly valued, and software as meaningfully undervalued.

Quantum computing is an emerging area that is likely to have a profound impact on the compute function, as it offers potential performance advantages over traditional computers. The market can be $200 billion annually at maturity, which we believe could be up to 30 years from now, and will be driven by fundamental performance advantages, new use cases for problems that cannot be addressed by computers today, and mass market adoption. We think quantum computers will ultimately be consolidated into existing cloud provider services.

Top Technology Sector Picks

Broadcom

• Fair Value Estimate: $480.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

Broadcom AVGO is one of our top picks in semis. The company has built a leadership position in AI chips through customized processors for large customers such as Google. We see strong demand over the medium term as Broadcom’s existing customers increase orders and the firm adds new customers, such as Anthropic and OpenAI. We see AI revenue acceleration in 2026 and continued robust demand through 2027. Broadcom is also an excellent allocator of capital and a prolific generator of free cash flow across both semis and software.

Microsoft

• Fair Value Estimate: $600.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

Wide-moat Microsoft MSFT is one of our top picks in software. The company dominates several of its served markets, such as Office in productivity software and Windows for PC operating systems, and the firm has also established itself as one of two clear leaders in public cloud. We expect the proliferation of hybrid cloud environments to further strengthen Microsoft’s position with Azure. Further, the company’s investment in OpenAI has propelled Microsoft to a leadership position in generative AI, accelerating Azure growth in recent quarters. Our growth estimates are centered around Azure, Microsoft 365 E5 migration, traction with the Power Platform for long-term value creation, and proliferation of AI.

NXP Semiconductors

• Fair Value Estimate: $280.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

Wide-moat NXP NXPI is one of our top picks in semis. As automotive and industrial demand improve from cyclical and tariff softness, we anticipate that the company will benefit from a recovery. We like its outsize exposure to autos, where it obtains nearly 50% of its revenue. NXP is well-diversified in autos with a broad portfolio of processors, microcontrollers, and analog parts. The firm should gain share in electrification and safety automotive products too, such as radar and battery management systems. Overall, NXP’s auto business is well tied to the secular tailwinds around rising chip content per vehicle.