U.S. technology stocks continue to dominate equity market valuations, even as their share of corporate earnings declines — a widening disconnect that is prompting caution among market strategists. According to a Reuters analysis, tech companies accounted for 20.8% of total S&P 500 earnings in Q3 2025, down from 22.8% three quarters earlier.
Despite this earnings slowdown, the sector’s share of the index’s market capitalization climbed to 31.1%, up from around 30% at the start of the year.
Analysts say this divergence — combined with the sector’s heavy weighting in passive portfolios — increases the risk of broader market pressure if earnings fall short of expectations.
Illia Kyslytskyi, Head of Research at Yaru Investments, noted:
“The wider gap between the tech sector’s percentage in the S&P 500 market cap is partly justified by genuine future earnings power and free cash flow growth, but not entirely.”
AI Hype Lifts Valuations — But Raises Expectations
Tech stocks have been central to the 2025 market rally, driven largely by optimism that artificial intelligence will unlock outsized long-term profits. This enthusiasm has pushed valuations notably higher.
The Nasdaq Composite now trades at a forward P/E of 29.28, well above its 10-year average of 23.48, and higher than the S&P 500’s 24.35.
While the sector delivered strong profits in the September quarter — led by AI beneficiaries such as Nvidia — analysts warn that future earnings will depend on how effectively AI adoption drives customer revenue, and how efficiently providers manage their substantial capital expenditure.
Alexander Lis, Chief Investment Officer at Social Discover Ventures, said margins for the “Magnificent 7” were temporarily supported by AI-driven spending cycles, adding:
“Suppliers booked revenue upfront, which suggests profitability could normalise as spending slows.”
Potential Downside Risk if Earnings Disappoint
The Nasdaq index is up 18.4% year-to-date, yet has already slipped 3.5% this month, indicating increased volatility as valuations climb further from underlying profit trends.
Derek Izuel, Portfolio Manager at Shelton Capital Management, cautioned that tech stocks could decline if earnings fail to keep pace:
“A mid-single-digit pullback is possible, but a more severe correction — bringing the risk premium back to normal — would be closer to a double-digit decline.”
For global investors, the growing gap between valuation and earnings contribution signals the need for greater discipline when assessing tech exposure — especially as AI-driven optimism becomes increasingly priced into forward multiples.
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