Several themes are currently shaping the investment landscape in the technology sector. While there is an abundance of short-term noise from tariffs, capital expenditure volatility and AI hype cycles, we are focused on structural trends that are likely to define sustainable long-term returns. Below, we outline five key discussion points that are top of mind for investors.
Key Takeaways:
- Tariffs within the technology sector are manageable.
- Infrastructure providers continue to capture the majority of value in the public artificial intelligence (AI) ecosystem.
- Some legacy software vendors are vulnerable to disintermediation.
- Magnificent Seven performance will be driven by a reacceleration of free cash flow growth.
- As AI scales, power availability will become a key focus and investment area.
1. Tech and Tariffs – Manageable Headwinds
The reemergence of tariffs as a policy lever, particularly in U.S.-China relations, has understandably raised concerns. However, we view the impact on most of the tech landscape, particularly large cap tech firms, as manageable rather than a source of structural headwinds. Most companies have already diversified their supply chains post-COVID, with Southeast Asia, India, and North America growing in importance as manufacturing locations. While tariffs may introduce frictional costs, they are unlikely to materially derail earnings trajectories for global tech leaders with pricing power and logistics flexibility.
However, we do expect tariffs within the tech sector to result in indirect headwinds, such as demand destruction due to greater economic uncertainty. This is already evident, as some technology companies have displayed a slowdown in hiring, budget shifts, reprioritization of projects and/or lengthening sales cycles, which all have the potential to hinder future growth.
2. Preferred AI Plays – Infrastructure Over Application
AI remains a dominant force in capital markets and corporate strategy. Yet, as the ecosystem evolves in the public markets, infrastructure providers continue to capture the lion’s share of value creation. Companies that enable AI—through chips, networking, power, and data centers—are better positioned for AI monetization than today’s application-layer companies.
NVIDIA’s outperformance is the most prominent example, but similar upside potential exists in specialized chipmakers, power-efficient hardware manufacturers and cloud service providers with advanced AI platforms. We maintain a constructive view on select enablers of inference computing and edge AI deployment, as well as those with exposure to emerging technologies such as robotics.
We believe there will be significant disintermediation within the software landscape, as it appears large language models are encroaching into many markets that were served by this subsector.
As shown below, we see the AI infrastructure subsector significantly outgrowing the software subsector as cloud service providers and enterprises focus their budgets on their AI strategies. The AI cohort added over $250 billion in incremental revenue, with a 42% compounded annual growth rate between the 2026 revenue consensus estimate vs. 2023 levels. In contrast, the software cohort only added $20 billion during the same time span, representing only 10% annual growth.
3. AI Disruption Risk – The Other Side of the Coin
While AI promises efficiency gains and new business models, not all tech companies will benefit. Some legacy software vendors are vulnerable to disintermediation, especially where AI commoditizes previously high-margin functions. Companies who are heavily reliant on headcount revenue models may face headwinds as AI improves productivity. In addition, in many markets AI is being introduced, total cost is below the incumbents’ price points, which means we may witness a shift in pricing dynamics.
Investors should exercise caution with firms that lack a credible AI road map or whose product lines are susceptible to disruption. Valuation discipline and rigorous competitive analysis remain essential in assessing the true AI winners and losers.
4. Magnificent 7 and U.S. Exceptionalism – Growth Reaccelerating
Objectively, the “Magnificent Seven” mega cap tech firms have dominated returns over the past five years. However, this group of stocks had lagged the overall market since mid-2024. Investors anticipated 2025 would experience a noticeable deceleration in free cash flow growth, particularly when excluding NVIDIA, and were unwilling to assume this elevated spend would drive an acceptable return on investment.
Looking ahead, free cash flow acceleration is likely to resume, supported by improved monetization of AI, efficiency gains and a broadening of demand. Over the long term, U.S. tech remains structurally advantaged due to a unique combination of capital markets, innovative ecosystems and intellectual property protection.
5. Powering AI – The Quiet Constraint
As AI scales, power availability and sustainability are emerging as critical bottlenecks. AI workloads consume 10x more energy than traditional search queries. Data center demand for both power and water is growing exponentially, with AI-specific data centers expected to consume six times more water by 2027, matching the annual consumption of Denmark.
Policy and private sector responses are already underway. For example, the Department of Energy is urging a tripling of nuclear capacity by 2050, while major cloud providers, such as Microsoft, Amazon and Meta, are signing multi-decade nuclear power agreements to secure long-term energy needs. These moves signal a major transition toward more predictable power sources to support AI at scale.
For long-term investors, the convergence of tech and energy policy is a critical area to watch, particularly for identifying second-derivative beneficiaries, such as nuclear energy producers, grid infrastructure companies and energy-efficient hardware vendors.
Final Thoughts
As the largest and most profitable sector in the S&P 500, technology is poised to continue providing compelling long-term investment opportunities. The advancement of AI will be a powerful force in driving efficiency and productivity gains, as well as margin expansion and earnings growth. As with any innovation, some industries and sectors will benefit more than others. Overall, we believe the U.S. will continue to dominate the AI innovation race, keeping U.S. leadership alive and well.
