Following a turbulent first quarter in 2026 that saw a 7% drawdown in the Nasdaq and a staggering 30% sell-off in software, the "buy the dip" narrative returned with a vengeance earlier this month.
While hardware and semiconductor giants like Nvidia have already rocketed to new highs, up over 60% year-over-year, a deep valuation gap has emerged elsewhere in the sector. With the broader US market trading at a 13% discount to fair value this April, investors are grappling with a "K-shaped" recovery: hardware is booming on the back of urgent AI infrastructure needs, while enterprise software remains mired in a correction as markets reassess the "AI-disruption" risk to traditional business models.
Geopolitics, inflation and the repricing of risk were central to the technology sector’s rocky start to the year, according to Matthew Bartolini, Global Head of Research Strategists at State Street Investment Management, who says the selloff was less about fundamentals and more about shifting market conditions.
Both geopolitical shocks and valuation dynamics weighed on technology stocks in Q1, but in an interview with InvestmentNews, Bartolini emphasizes that they worked through related channels rather than acting independently.
“Both played a role in technology stock price performance, though through similar but distinct transmission mechanisms,” Bartolini says.
He explains that rising geopolitical tensions increased uncertainty across markets, which in turn forced investors to demand higher compensation for risk.
“On the geopolitical front, heightened macro uncertainty widened risk premiums across asset classes, including growth-sensitive technology stocks,” he says. “With greater uncertainty around future economic and fundamental growth drivers, investors demanded higher compensation for risk, which translated into lower asset prices as capital rotated toward the liquidity and perceived safety of cash.”
At the same time, inflation concerns resurfaced, complicating the outlook for monetary policy and reinforcing pressure on valuations.
“That same macro uncertainty also influenced near-term inflation dynamics, with implications for monetary policy. As inflation risks re-emerged, expectations shifted toward the Federal Reserve potentially delaying rate cuts, pushing interest rates higher across the yield curve. This raised the discount rate applied in present-value calculations of future cash flows,” Bartolini says.
For growth-heavy sectors like technology, that shift in rates has an outsized impact.
“Higher discount rates reduce the present value of those cash flows, prompting a market re-rating. Growth-oriented sectors, which can be viewed as longer-duration equities, are particularly sensitive to this dynamic. As a sector with a high growth profile, Technology was therefore more affected.”
Crucially, Bartolini stresses that the selloff should not be interpreted as a deterioration in underlying business strength: “Importantly, this was not a fundamentals-driven selloff, but rather a re-rating and de-risking event.”
That distinction is particularly relevant as investors weigh the long-term promise of artificial intelligence against near-term volatility driven by heavy investment spending.
“AI-growth monetization is in the early stages, but the CapEx fueling that potential growth is much further along,” Bartolini says. “So, a lot of cash is going to support the build out, with not the equal or greater cash flow being generated by that spend. That can create near-term volatility as the actual growth production and productivity efficiency is uncertain.”
For advisors trying to separate noise from opportunity, he points to several indicators that can help clarify the trajectory of AI-driven growth.
“To separate near-term headline volatility from long-term growth potential, investors can focus on three key trends,” he says, highlighting hyperscaler capital expenditure plans, earnings trends across the AI ecosystem, and the ability of large firms to fund investments internally.
“Continued increases signal that these firms view AI as a critical growth engine and intend to compete aggressively in this space,” Bartolini says of hyperscaler CapEx. He adds that “strong growth among suppliers to the AI build-out, such as semiconductors and cloud infrastructure, indicates that the ecosystem is already monetizing AI and reinvesting in future phases.”
Balance sheet strength also matters.
“The ability of these firms to exceed expectations and fund AI investments through internal cash flow, rather than incremental leverage, supports the sustainability of the build-out. Recent debt issuance remains modest relative to balance-sheet strength and is still in its early stages.”
At the same time, the rise of AI is reshaping competitive dynamics within the technology sector itself, leading to unusually high dispersion in returns.
“AI is disrupting a wide variety of markets, including within the tech sector as its impacts are still fully unknown,” Bartolini says. “And this ambiguity over eventual AI leadership and certain industries (e.g., software) drawdown have produced a market dynamic rarely seen outside of major inflection points.”
He notes that dispersion across technology sub-industries has reached historically extreme levels.
“Return dispersion across the 11 Technology sub industries has surged to extreme levels, reaching well above the 90th percentile historically.”
Such conditions have typically coincided with periods of market stress—but this time, the broader market has remained resilient.
“This level of dispersion has occurred only during the COVID-19 pandemic, the Great Financial Crisis, and the dot-com bubble. Three major memorable market events that have historically coincided with broad market meltdowns. But, today, the market is up, making this level of dispersion extremely noteworthy.”
In retrospect, Bartolini suggests this moment could mark a structural turning point.
“In hindsight, this period could be viewed as the point at which a structural divide emerged within the Technology sector—driven not by external forces, but by innovation originating in the sector itself,” he says. “As AI reshapes competitive dynamics, Technology appears to be fragmenting into firms that are successfully translating AI investment into sustainable growth and those that are not.”
Despite macro uncertainty, Bartolini remains constructive on the sector’s earnings outlook, pointing to strong momentum and upward revisions.
“While economic growth expectations have slightly declined on the back of the Iran War, the forecasts are still for positive aggregate growth for 2026,” he says, adding that technology is less tied to the economic cycle than more traditional sectors.
“Fundamental momentum, for tech, will have more primacy over earnings trends. And there is real strong fundamental momentum in these expectations that indicate this can continue.”
That momentum is reflected in forecasts that place technology well ahead of the broader market.
“Technology is poised to continue leading earnings growth across the sectors in 2026 (+37%), more than double the broad market (+16%). Since December, growth expectations have revised upward by 56%, with all six of Tech’s underlying industries expanding—led by semiconductors at +71%.”
At the same time, recent price declines have improved valuations.
“This strong earnings sentiment, alongside the negative price action over the past few months have created attractive valuations in Tech,” Bartolini says. “The sector’s absolute and relative next-12-months (NTM) P/E is in the bottom quintile of its past 5-year history.”
Beyond technology itself, the AI buildout is already driving tangible gains across adjacent sectors, particularly in infrastructure.
“For technology and the hyperscalers there is a wide cone of estimates around the timeline,” Bartolini says. “But what has a narrower cone of growth monetization outcomes is the infrastructure needed to support the AI build out. Semiconductor firms are already witnessing this growth.”
He adds that industrials and utilities are also benefiting from the surge in demand tied to AI.
“Industrials are positioned as a ‘pick-and-shovel’ beneficiary across the AI buildout value chain spanning power infrastructure, electrical equipment, advanced cooling systems, and data center construction,” he says.
“Utilities are another sector in the ecosystem of AI already witnessing tangible benefits from the need for power related to AI-innovation.”
That demand is already showing up in earnings expectations.
“Earnings per share (EPS) estimates for 2026 have steadily risen over the past six months with broad-based upgrades. Utilities now rank third in positive EPS revisions and its 2026 growth expectation of 12.3% is nearly double its 10-year average.”
Finally, on the infrastructure and reshoring themes, Bartolini points to semiconductors as a key focal point for investors.
“Semiconductors are the most directly exposed to infrastructure demand,” he says. “A global resource competition is unfolding around the critical inputs required for AI, with semiconductors at the center of that dynamic.”
As countries compete for technological leadership, supply chains are becoming a strategic priority.
“As nations compete for AI leadership, these inputs are increasingly becoming strategic national priorities, with governments emphasizing self-sufficiency to reduce supply-chain choke points and secure long-term competitiveness.”
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