Will the Tech Boom Last?

Tech stocks have dominated the market for the past decade and should continue to do so into early 2025 thanks to innovation surrounding generative artificial intelligence, or GenAI.

This rapidly advancing technology uses language processing and machine learning to creatively generate new data or content, like music or computer code, that mimics human-generated content. The emergence of GenAI as a new capital-expenditure (CapEx ) driver has kicked off a growth cycle, sending many related stocks to new highs. In fact, CapEx investment in GenAI is the primary force behind today’s stock market performance and almost entirely explains why the market is so expensive. In short, the stock market has followed the rising path of capital investment in GenAI and the promise of productivity and efficiency gains that will boost revenues and profits far out into the future.

But will it last?

For the immediate future, the answer is probably yes. Current estimates for CapEx are likely to be revised higher—at least into the first quarter of next year. This may put upward pressure on earnings expectations for technology, communications, industrials, consumer discretionary, and utility stocks. Expectations will likely be highest for companies and industries that are directly tied to building and connecting data centers, as well as firms developing applications (apps) that will drive GenAI use.

History tells us stocks tied to most CapEx cycles behave similarly. In this instance, computing capacity across data centers and the development of apps probably has room to run in early 2025. However, this CapEx cycle is not young, and caution is warranted with today’s market valuations as high as they are. Most CapEx cycles start slowing as investor optimism ebbs and usually end when supply exceeds demand. Think the internet buildout of the late 1990s. Rising interest rates are often the catalyst to disrupt, or even end, a CapEx cycle.

Bottom line: AMG does not expect a substantial rise in interest rates in early 2025, nor an end to the GenAI CapEx cycle. That said, investors should be cognizant of an eventual end and how expensive related stocks are currently. Investors should consider diversifying into cheaper areas of the equity market. AMG’s analysis shows the median U.S. small- and mid-cap stocks are more than 25% cheaper than the median large-cap stock and more than 50% cheaper than the top ten stocks in the S&P 500. Additionally, U.S. small- and mid-cap stocks are likely to benefit from new domestic fiscal policies next year.