Technology has been the driving force behind market gains in 2025, but soaring valuations are prompting investors to question how much upside remains.
The latest Sevens Report points to “massive demand for semiconductors and AI infrastructure combined with the promise of AI-driven leaps in profitability” as the main reason tech has led the S&P 500’s rally.
However, the report warns that valuations are now hard to justify. Palantir (NASDAQ:PLTR) is highlighted as “the most obvious example,” described as “a stock that is the best performer in the S&P 500 YTD but also trades at a quasi-absurd 212X forward earnings!” Even broader ETFs like XLK are trading at “above 29X earnings, a level that hasn’t proven historically sustainable.”
Recent earnings reactions from CoreWeave, Applied Materials (NASDAQ:AMAT), and Cisco (NASDAQ:CSCO) caused slight declines in AI-related names, offering some relief to stretched valuations. Yet, Sevens cautioned that “the ‘bar’ to impress investors in the AI names is high.” With rate cuts expected next month, money is also rotating into cyclical sectors such as utilities, industrials, and financials.
For investors entering the market, Sevens noted the difficulty in identifying value. “The reality is that finding value in the tech space is a challenge, especially for new money that needs to be allocated but doesn’t want to chase sky-high valuations,” the report said.
The note suggested alternative ETF strategies as a way to participate in the AI rally while managing risk. Options include equal-weight and smart beta ETFs, as well as income-focused ETFs that “boost yield, and in doing so lower the aggregate valuation of the ETF.”
“Alternative tech strategies that can complement core tech holdings can lower overall tech valuations in a client portfolio, yet still provide exposure to the key names in the space,” Sevens concluded.
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