Amid volatility, tech sector moves forward

IF IT’S not geopolitical shocks roiling markets it is artificial intelligence (AI), either because AI is a bubble, or because even if it is decidedly not, it would instead wreak havoc across business models and the labour market.

The news over the past few weeks has highlighted different aspects of AI’s disruptive power. Announcements of even greater capital expenditure from major tech players point to lower margins. The increasing availability of open-source AI tools means that revenues for the industry may be lower.

Since last summer, tech-sector volatility has been twice as high as for the rest of the market. It will take time for analysts to assess the net impact of all these factors and for earnings expectations to adjust. Hence, caution in the short term is in order.

Tech prospects still better

Investors are accustomed to larger positive surprises during the earnings season, but the situation seems to be changing. Most companies in the Nasdaq 100 index have announced their results. While earnings growth for the companies that have already reported looks strong, 17 per cent in aggregate, that is only in line with expectations.

Meanwhile, the earnings growth for S&P 500 companies are similar (14 per cent), but positive earnings surprises are better compared to those in Nasdaq 100 (7 per cent). These factors, alongside the lack of big earnings surprises and caution expressed by the management of tech companies with respect to the future, help explain why non-tech stocks have outperformed.

Even if it is wise to be cautious tactically, we are still optimistic strategically. The volatility in tech stocks is accompanied by superior long-term returns. While the earnings growth rate for tech stocks may be revised downwards, it is still likely to be far better than that for non-tech stocks.

Currently, tech profits are expected to rise 26 per cent this year compared with just 11 per cent for non-tech stocks (2025 rates are 21 and 8 per cent, respectively). The size of that gap means it will be difficult for non-tech stocks to sustainably outpace tech stocks without a significant deterioration in the outlook for the latter’s profits, or a reduction in the multiple on tech earnings.

Recent headlines simply reinforce the importance of diversification. While always valuable for a portfolio, it is all the more critical given the rapid developments in the tech industry.

Almost any player can be disrupted, but the likelihood is that the disruptor will be somewhere else within the index. Losses on any one stock should be compensated by gains in another and aggregate earnings should continue to rise.

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Beware of inflation rebound

Recent economic data in the US continues to point to steady growth. Purchasing managers’ indices are in expansionary territory. Fourth-quarter gross domestic product growth was below expectations but much of the shortfall was due to the government shutdown, and its impact should reverse in the current quarter.

The current turmoil in the Middle East is likely to add to inflationary pressures. It may therefore be challenging for the US Federal Reserve to deliver the two cuts in the fed funds rate that markets expect. If the market does need to adjust its expectations regarding the number of rate cuts, the equity market could come under pressure, especially for tech and small-cap stocks.

Once the adjustment has been made, however, the outlook for strong economic growth and slightly higher inflation would likely support subsequent gains in markets.

Catalyst for renewables foundational infrastructure

At this stage, basic AI foundations are in place, and it is easy for all of us consumers to use. Yet AI capital investment will pay off only when enterprises and governments can use it at scale, which depends on building – and financing – the most complex infrastructure ever created, comprising computing power, data centres and low-cost, reliable energy.

The ongoing conflict in Iran has triggered a significant global energy displacement and price rise. Investors are increasingly concerned that sustained high energy costs will serve as a “tax” on corporate earnings, forcing a reassessment of the return on equity for ambitious AI projects.

Higher energy prices act as a headwind by inflating the operational costs of energy-intensive data centres. Equally, it puts pressure on the hardware supply chains that largely reside in Asia – a region heavily dependent on the oil supply from the Middle East.

Some market participants are concerned that sustained energy sources are a likely bottleneck for the AI build-out; the Iranian crisis has created an urgency. The conflict is likely to catalyse an acceleration in the transition to renewable energy, transforming it from a climate goal into a national security imperative.

Decentralised power sources such as solar, wind and nuclear power provide a vital energy firebreak that insulates the global economy from oil volatility. This shift is particularly critical for the AI theme, where the vast electricity demands of next-generation data centres require stable, predictable pricing that volatile oil markets can no longer guarantee.

By decoupling power generation from geopolitical chokepoints, renewables offer a structural hedge. Major tech firms are now bypassing traditional grids to invest directly in utility-scale battery storage and modular nuclear reactors, ensuring that the AI capex story remains on track.

Daniel Morris is chief market strategist and Ecaterina Bigos is chief investment officer, Asia ex-Japan, BNP Paribas Asset Management