What should investors do with tech stocks for H2?

Investing.com -- Investors should consider taking a balanced approach to technology stocks in the second half of 2025, Bernstein analysts say, keeping a market-weight position with a “slight positive lean.”

The broker sees momentum in the nearly three-year AI trade continuing, with few signs of slowing, and notes that “positive tariff or macro-related headlines could drive a recovery amongst the broader tech space and AI laggards.”

Historically, tech has outperformed the market 65% of the time over the past two decades, with underperformance tending to occur in the first half of the year.

Tech’s performance in the first half of the year closely tracked the overall market, with only 70 basis points of cap-weighted outperformance — the narrowest gap in more than a decade.

Gains were concentrated in eight large-cap “AI winners,” excluding Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOGL), which together delivered almost 1,200 basis points of outperformance.

“Getting the largest stocks right remains critical,” analysts led by Mark Shmulik said.

The sector trades at about 30 times forward earnings, a 33% premium to the market, down from 2023 peaks but still above the historical average of roughly 26%.

Bernstein notes that this premium is underpinned by earnings growth rather than multiple expansion — the main driver of first-half gains — making valuations “more sustainable” than in past cycles.

Moreover, tech continues to rank highest on quality and return on invested capital, with high free cash flow margins and smaller downward earnings revisions than the broader market.

“Tech also isn’t notably crowded relative to its own history,” Shmulik continued.

Overall, Bernstein advises a “balanced barbell” strategy between expensive growth names and inexpensive value stocks, avoiding what it calls “growth stock purgatory” — companies not cheap enough for value investors or fast-growing enough for growth investors.

Large-cap valuations are mixed, with some mega-caps such as Amazon (NASDAQ:AMZN) and Google screening as relatively inexpensive versus their history.

Potential risks include elevated valuations, a weaker long-term growth outlook, and the sector’s high concentration, alongside the possibility of an AI “digestion cycle” if the heavy capital spending by hyperscalers fails to deliver returns.

Nonetheless, history shows that after periods of underperformance or market-level returns, tech has typically outperformed the market by 4–7% over the following 6–12 months.