ETF in Focus: Why the big tech trade may not be over yet

James Waterworth | BlackRock Australia

The Magnificent 7 technology stocks (Apple, Microsoft, Tesla, Google, Amazon, Meta, and NVIDIA)¹  have significantly driven the US equity market rally over the past two calendar years, returning over 150% compared to about 30% for the rest of the S&P 500 Index.²

Last year, Australian investors flocked to technology-themed investments. The iShares Global 100 ETF (IOO), our fund with the most exposure to tech, saw around $300 million in inflows, making it one of the top 5 most popular iShares ETFs.³

While the sector’s dominance has been tested this year by the new AI model from Chinese tech lab DeepSeek, the rapid growth of the Magnificent 7 means technology and communications now make up almost 35% of the MSCI World Index - the highest share since the early 2000s.⁴

Indeed, if we presume the “usual” business cycle conditions that defined the pre-pandemic era, it may seem as if these sectors are overvalued.

However, we would argue artificial intelligence – which is driving this unprecedented growth in tech – is a long-term mega-force disrupting the global economy, to the extent that it’s breaking historical trends in real time. 

For instance, we estimate global spending on AI infrastructure – such as data centres, chips and the power systems required to fuel AI technology – could top US$700 billion, or 2% of US GDP, by 2030.⁵

Are valuations still fair?

Despite a huge couple of years for tech and US equities more broadly - the first time the S&P 500 Index has generated 20% returns for two consecutive calendar years since the late 1990s – Australian advisers remain optimistic about the sector’s prospects in 2025. Data from our first quarterly pulse survey conducted in Q4 2024 shows that most financial advisers believe tech will generate the strongest returns of any sector this year.

This may be because the economic fundamentals of the tech sector indicate we are still some way off a bubble. Taking a look at 12-month forward price to earnings ratios for the sector (see below chart), we can see that these are higher than the broader equities market, but significantly lower than the extremely stretched valuations that heralded the crash of the early 2000s.

Tech and communications forward P/E ratios

The question of over-investment by the big tech firms has also been raised, particularly given the recent release of DeepSeek’s seemingly more efficient AI model, which has seen NVIDIA⁶ in particular give back some gains from a price perspective.

We think investors need to take a long-term view on spending given AI’s potential to unlock new revenue streams – broad adoption of the technology is still to come, and we have barely scratched the surface of all the AI use cases. Recent developments with DeepSeek could push AI adoption sooner and ensure AI remains a key focus in US-China strategic competition, including any resulting US trade barriers.

Tapping into tech through the Global 100

ETFs with a high weighting to tech may be suitable for investors wanting to tap into the long-term growth opportunities offered by AI, while also building in broader diversification⁷ to other sectors. Opportunities to invest in technology through Australian equities are limited, with the sector making up just 3% of the ASX 200,⁸ so building out a broad global equity exposure with a tilt towards technology may make sense for investors with an existing portfolio of Australian shares.

The S&P Global 100 Index, tracked by IOO, offers an over 40% weighting to the tech sector. Companies in this index are selected for their global significance, deriving at least 30% of their revenue from outside their own geographic region and with a minimum market cap of US$5 billion.⁹

Generating an average annual return of more than 13% over 10 years, and with significant non-tech holdings including JPMorgan and Eli Lilly, IOO gives investors access to some of the largest economic ‘mega forces’ including the ageing population and the future of finance.¹⁰

Of course, the exact trajectory of the AI transformation is not yet certain, meaning there may be bumps along the way, so investors should always consider tech exposure as just one part of a broader, diversified portfolio. However, we think the investment arms race underway in the technology space makes this thematic a compelling part of portfolios in the years ahead.