Tech outlook brightens as AI spending broadens and rate cuts loom

​​​Earnings growth reaccelerates on continued AI investment

​The technology sector is entering 2026 with a more favourable backdrop than many had anticipated. Earnings growth is reaccelerating, driven by the AI investment cycle that continues to dominate corporate spending priorities.

​Cloud, semiconductors and software are expected to deliver double-digit revenue gains, though the pace has moderated from the surge seen in 2024–25. This is hardly surprising – such breakneck growth was never going to be sustainable indefinitely.

​What matters more is that the momentum remains intact. Companies are still spending heavily on AI infrastructure, and this spending is translating into revenue for the tech firms best positioned to capture it.

​The slowdown in growth rates is a normalisation, not a reversal. The underlying demand for AI capabilities shows no signs of weakening.

​Rate cuts provide tailwind for long-duration assets

​Rate cuts are providing additional support for valuations, with the Federal Reserve (Fed) expected to ease through 2026 as labour-market softness builds. Lower discount rates favour long-duration assets, and technology stocks fit that description perfectly.

​The Nasdaq 100 looks well positioned relative to other US indices, benefiting from both the structural AI trend and more accommodative monetary policy. This combination doesn't come along very often.

​When it does, it tends to provide a powerful tailwind for growth stocks. The last time we saw rates falling while a major technology cycle was in full swing, tech stocks delivered exceptional returns.

​The current setup looks similar, though investors should remain mindful that central banks could change course if inflation proves stickier than expected.

​AI leadership broadens beyond mega-cap platforms

​The composition of AI winners is shifting in a way that should reassure investors concerned about concentration risk. The early phase of the AI boom was dominated by mega-cap platforms – the usual suspects that everyone already owned.

​Now we're seeing leadership broaden to second-tier beneficiaries: chip-equipment makers, data-centre infrastructure providers, cybersecurity firms and automation specialists. This rotation reduces the risk that dominated earlier cycles, when a handful of names accounted for the bulk of market gains.

​Broader leadership tends to make rallies more sustainable. When gains are concentrated in just a few stocks, any stumble can quickly derail momentum.

​A wider base of participation suggests the underlying trends are strong enough to lift a larger group of companies. This is a healthier market structure than we've seen in previous technology booms.

​Margin pressures ease despite capital intensity

​Margin pressures are easing, helped by strong pricing power and delayed hiring plans. Efficiency savings from AI tools are also starting to flow through to the bottom line, as companies find ways to automate tasks that previously required human input.

​However, capital intensity remains a headwind, particularly for chip manufacturers and data-centre operators. The buildout required to support AI workloads is expensive, and this is weighing on free-cash-flow conversion.

​Investors need to be comfortable with this dynamic – the returns will come, but they require upfront investment. The biggest players can afford to make these investments, but smaller firms may struggle to keep pace.

​This creates a natural winnowing process, where only the strongest balance sheets can compete effectively. That's not necessarily a bad thing for shareholders in the winning companies.

​Regulation remains the key uncertainty

​Regulation remains the wild card that could disrupt the narrative. Antitrust scrutiny of cloud providers and AI models is intensifying in both the US and EU, with enforcement actions likely to reshape competitive dynamics.

​Whether this represents a genuine threat depends on how aggressively regulators choose to act. Past experience suggests that tech firms are adept at navigating regulatory challenges.

​While enforcement could slow growth at the margin, it's unlikely to derail the broader investment cycle. The demand for AI capabilities is simply too strong, and regulators will be wary of stifling innovation.

​That said, investors should monitor regulatory developments closely. A shift towards more aggressive enforcement could force portfolio adjustments, particularly in the mega-cap names that face the most scrutiny.

​Positive scenario bias for 2026

​Most strategists are expecting high-single-digit to low-double-digit total returns from the tech sector, assuming no sharp profit recession and continued AI infrastructure demand. This scenario bias tilts positive, but it's worth noting what could go wrong.

​A deeper economic slowdown would hit corporate IT budgets, and any signs that AI spending is peaking would prompt a swift reassessment of valuations. These risks exist, but they don't appear imminent.

​For now, though, the path of least resistance remains higher. Earnings are growing, rates are falling, and AI spending shows no signs of abating.

​Technology remains the sector where the most compelling growth stories reside, and that's unlikely to change in 2026. Investors who stayed on the sidelines last year will be asking themselves whether they can afford to miss out again.

​Nasdaq 100 chart

​The index’s dip to below 16,000 during the Liberation Day selloff provided the dip for a almighty rally which has taken the index to fresh record highs. A close above 26,000 seems likely before 2025 is out, and the longer-term trend is stubbornly intact. Bubble fears have failed to dislodge it, and recent weakness found support at 24,000.

​The index has not endured a substantial pullback since April, so going into 2026 it makes sense to be prepared for some volatility. For example, a drop back to 23,000 would feel dramatic, though it would likely prove to be another higher low. Too much energy has been wasted calling a top in this index, and with earnings growth so strong the fundamentals and technicals continue to align.

​Nasdaq 100 chart