(Bloomberg) — Big Tech stocks are back and powering the S&P 500 Index to new highs, giving investors confidence that the latest equity market rally has room to run even as the risks from the war with Iran remain.
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Since the S&P 500 hit its 2026 bottom on March 30, the technology sector has gone from the worst group in the benchmark to the best. An index tracking the so-called Magnificent Seven technology giants is up 20% over that period, reversing a 17% decline from its October peak. Shares of Microsoft Corp. are probably most emblematic of the turnaround, surging 19% after tumbling 34% from their October 28 peak to their March 27 low.
“What we learned over the past six months is that the S&P can’t really move higher without tech,” Ohsung Kwon, chief equity strategist at Wells Fargo.
More than half of the S&P 500’s recent advance is coming from just seven companies — Nvidia Corp., Amazon.com Inc., Microsoft, Broadcom Inc., Alphabet Inc., Meta Platforms Inc. and Apple Inc. Taken together, they’ve added roughly $4 trillion in market value in a matter of weeks, according to data compiled by Bloomberg.
“It’s been an incredibly fast turnaround,” said Paul Wick, chief investment officer at Seligman Investments, which has about $30 billion in assets. “To some degree this is a catchup trade, it’s a positioning trade.”
Indeed, it’s hard to chalk up the move to fundamentals since nothing has really changed for the companies in this short period. The geopolitical outlook remains dicey, with tension in the Middle East still simmering and threatening global growth. Oil remains elevated despite recent declines, keeping inflation sticky. And yet the S&P 500 and tech-heavy Nasdaq 100 Index set records last week and kept rising.
“We were sort of stuck at 7,000 because tech wasn’t moving higher, especially the hyperscalers,” Kwon said, referring to the Big Tech companies that are providing the computing infrastructure for artificial intelligence. “If they continue to outperform from here, that’s actually a net positive for the S&P 500.”
The rebound follows a rare period of weakness for the group, which has led the S&P 500 for most of the three-year-bull market on AI euphoria and strong earnings growth. Late last year, Wall Street started to grow concerned about the rapidly increasing capital spending to support the technology, causing many market professionals to question when larger payoffs from those investments will materialize.
Those fears are still present. Just two weeks ago, hedge funds dumped US tech stocks at the fastest pace in more than five years, according to data compiled by Goldman Sachs Group’s prime brokerage unit. Nearly all tech sub-sectors saw net outflows, led by software, which accounted for roughly 60% of the total net selling and was almost entirely driven by short sales.
However, the selloff has made tech valuations much more attractive than they were a few months ago. Excluding Tesla Inc.’s stratospheric multiple, the Magnificent Seven is priced at about 24 times projected profits, down from 29 times at the end of October and not much more than the S&P 500’s current valuation of roughly 21 times.
Meanwhile, earnings growth for Big Tech is expected to remain strong, and the potential for returns on AI investments is improving, according to Kwon, who expects the S&P 500 to hit 7,300 by the summer, a 2.4% increase from Friday’s close.
“The hyperscalers are actually seen as the laggard trade because they have underperformed,” he said. “A lot of people missed this rally and they’re thinking about what to chase and they’re looking at hyperscalers as the more attractive option.”
Wall Street anticipates that upcoming earnings reports will justify the enthusiasm. The Magnificent Seven is expected to deliver profit growth of 19% this year, compared with 17% for the rest of the S&P 500, according to data compiled by Bloomberg Intelligence. That gap is projected to widen in 2027, with the cohort seen delivering earnings growth of 22% as the rest of the S&P 500 expands by 15%.
“While this narrative had emerged around ROIs, capex depressing cash flow, a lot of those fears are fading away,” said Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions. “If you look at the current businesses for these companies, they remain enormously profitable and kick off a lot of cash. That really affirms their role as the defensive part of the market.”
Of course, there’s still plenty of unease about the enormous amount of money being plowed into AI investments. The four biggest spenders — Amazon, Microsoft, Alphabet and Meta — are projected to sink more than $618 billion combined into capital expenditures in 2026, up from $376 billion in 2025, according to data compiled by Bloomberg.
The risk of that payoff is weighing on stock’s like Microsoft. Even though it’s coming off its best week since April 2015, it’s still down 22% from its October record. The reasons range from concerns about growth in Microsoft’s cloud computing business, to heavy spending, to the risks its software franchises like Excel face from Anthropic and other AI startups. As a result, the shares are priced at 23 times estimated profits, down from 33 times on Oct. 28 and below their 10-year average of 27.
However, investors may be missing the point of what the Anthropic developments means for Microsoft and other Big Tech companies. While they do represent a risk, they also offer validation of their capital spending, according to Seligman’s Wick.
“We’ve had this collective deep reservation that’s gone on about the hyperscalers spending too much money on AI data centers and is there going to be a good return on invested capital,” he said. “The positive developments at Anthropic, the fact that we’ve had headcount cuts at companies like Block, and claiming that efficiencies from AI are enabling them to streamline their organization, I think some of that is causing investors to think gosh, maybe AI is going to have this substantial payoff.”
Even without bigger immediate profits from AI investments, the tech giants’ dominant market positions and cheaper valuations are making them attractive, according to Natixis’s Melson.
“The setup is pretty positive,” he said. “These companies are going to be enormously profitable over the next 12 months, and that doesn’t incorporate any boost they may see from AI.”
–With assistance from Natalia Kniazhevich.
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