With the market’s fate over the next few years hinging on technology and fear of a bubble rising, where does the sector's strength stand?
AI continues to be the dominant theme driving equities higher, with the tech sector leading the way to the upside. With the intense levels of optimism surrounding AI, some worry we may be entering a tech bubble reminiscent of the dotcom era. While we won’t delve into the fundamentals of the AI hype today, we will provide some context on the health of the technology sector. With the market’s fate over the next few years likely hinging on technology, where does the sector stand?
Despite some recent concern, the technology sector has shown no signs of recent weakness, with the group returning to first place in DALI’s sector ranking. This marks the ninth time in since 2003 that technology ranked first in DALI, assuming some back-and-forth changes in March/April of 2017 are treated as one cluster. The average length of Technology’s time in first was 272 days but has lasted upwards of three years. During its time in first place, tech proxy XLK has averaged a return of 17.3%. Meanwhile, the two-year return from the start of its time in first has been positive 100% of the time with an average gain of 32.2%. All that to say, technology’s rise to first place has historically been constructive for the sector’s long-term returns.
While the technology sector has remained near or at the top of DALI’s sector rankings over the last few years, the magnificent 7 and other megacap names had been responsible for much of the upside during much of those years. One way to compare the performance of the “average” tech stock to the broader sector is by looking at the difference between equal weighted and cap weighted tech funds. From the end of 2022 to the start of 2025, the Technology Select Sector SPDR Fund (XLK) rose a total of 86.9%. Over that same period, the Invesco S&P Equal Weight Technology ETF (RSPT) rose 54%, meaning that the “average” tech stock underperformed the sector by over 30%. While a group can rise at the hands of just a few stocks, it tends to perform better when more stocks contribute to the upside. Thankfully, it’s been a different story for tech stocks this year, as XLK and RSPT are up 25% and 22.6%, respectively. Meanwhile, the two funds hold near-perfect fund scores, with XLK at 5.64 while RSPT is at 5.47, demonstrating the strength of both megacaps and the average tech stock.
The increase in breadth has also led to a notable uptick in participation indicators for the sector. The percentage of tech stocks trading in a positive trend, measured by ^PTECTECH, reached 47% after reversing back into Xs last month. While the overall number may sound unimpressive, that’s actually the highest the indicator has been since late 2021. If we were entering the a tech downturn in the immediate future, it would be unlikely for the sector to lead the market in relative strength while its participation reaches multi-year highs.
For context, PTECTECH reversed into Os in March of 2000 and fell below our current levels in April of that year, staying below 46% until July of 2003. Additionally, the overall levels for the indicator at its peak were in extremely elevated territory above 80%, with only 2021 seeing levels above 70% since then. While concerns about a bubble persist, current strength and participation metrics suggest resilience within technology for the time being. However, DALI and participation could be areas to keep an eye on if things start to burst.
