What’s going on with US tech?

Tech stocks are in the spotlight this week. Palantir, Nvidia, Tesla and others have all sold off sharply, as the market reviews the future of the AI trade and rotates out of highly valued tech stocks. It’s been a very different start to the year for the biggest US tech stocks. After an astonishing rally in 2023 and 2024, the Magnificent 7 has stalled in 2025. As a whole, the Magnificent 7 is back at December 2024 levels, Nvidia is lower by 4% YTD, Microsoft is down by 5% and Tesla is lower by a whopping 15% since the start of this year.

The once mighty tech sector in the US is no more. In the S&P 500, there is no longer a clear bias for tech stocks. The best performers year to date include Starbucks, CVS Health, Philip Morris, Uber and Intel, while the  weakest performers include Edison International, an electricity firm that is closely linked to the AI trade.

From a sector perspective, the semiconductor index has fallen from its top spot. The best performing sectors in 2025 include Transport, tobacco, healthcare and gold, tech is conspicuous by its absence. The reasons why tech has fallen out of favour come down to three factors, in our view.

DeepSeek

Nvidia’s share price reached a record high in early January, but since then it has been unable to return to those lofty heights. The arrival of DeepSeek, the Chinese AI company, has led to a temporary peak in the US AI story. For example, both Nvidia and AMD are underperforming the S&P 500 so far this year. In contrast, China tech stocks are surging. The Golden Dragon index, which includes US listed Chinese tech firms, is outperforming the Nasdaq composite index so far this year. Added to this, the S&P 500 is higher by 1.7% this year, compared to the 14.8% rise in the Hang Seng index.

Chinese tech stocks are playing catch up after years of underperformance, and this is weighing on the broader US tech sector. While there may be some concerns about DeepSeek and its ability to create its technology with what it is saying it did, there is still plenty of room for Chinese tech to play catch up. For example, Goldman Sachs estimates that Chinese tech firms boosted their capex spend by 60% last year, which means there could be plenty of scope for future Chinese AI advancements. To highlight this, Apple will use Alibaba AI tech in its iPhones that are sold in China, and Tencent will use DeepSeek. Thus, if US AI firms were banking on a China revenue stream, they need to think again. We expect this theme to weigh on US tech stocks for some time, although it will be interesting to see if Nvidia’s results, released on Wednesday night, can stem some of Nvidia’s sell off.

Defense budgets

Palantir, the data analytics firm, has seen its share price come under intense pressure this week. Its share price sunk 10% on Monday and is down 25% in the past week. The market was spooked by the prospect of US cuts to the defense budget, as Elon Musk tries to bring down the size of the US deficit. The US government is Palantir’s largest customer, and accounts for 41% of revenue. Thus, if budgets are cut and Palantir loses government business in the coming months and years, then this will have a meaningful impact on the company’s bottom line.

However, when one door closes, sometimes another opens, and this may be the case for Palantir. On Tuesday two developments have helped to boost its share price, which is staging a mini recovery after a hard few days. Germany’s new chancellor has said that he wants to create a special defense spending budget worth EUR 200bn, later on Tuesday, UK PM Sir Kier Starmer said that the UK would boost defense spending to 2.5% of GDP by 2027, and to 3% of GDP in the next decade. As Europe tries to play catch up with the US when it comes to defense capabilities, Palantir could find plenty of willing customers on the other side of the Atlantic, even if the US government scales back defense spending.

Right now, the majority of Palantir’s 79 customers are US based, which gives them scope to increase their presence in Europe and try to develop new revenue streams. Thus, we could see Palantir’s stock stage a short term recover on the defense spending theme.

Valuations

When you talk about tech, the issue with high valuations often comes up. This is the case for US tech stocks. However, after the recent sell off, some tech stocks are not looking as expensive. Below we take a look at three companies and their relative valuations.

Nvidia has a P/E ratio of just over 51 x earnings. This is one of the lowest valuations in the US semiconductor space. If Nvidia provides a strong future outlook for earnings, then its P/E ratio could fall even further, which may start to entice buyers back to the US tech sector.

However, there is no denying that there are cheaper stocks out there. For example, ASML, the Dutch company that specializes in chip making equipment, has a P/E ratio of 32.6 times earnings. There is a hefty discount between ASML and Nvidia, yet if Nvidia is doing well then ASML must be doing well since they are both integral to the chip making sector. ASML could become more attractive to investors than Nvidia, if traders continue to diversify their tech holdings outside of the US.

Lastly, sector rotation could also dim the attractiveness of the tech sector. Compared to tech, consumer staples and consumer discretionary stocks are more attractively priced and may shine in the current economic environment. For example, US listed Coca Cola has a P/E of 24 x earnings, while Reckitt Benckiser Group has a P/E ratio of 24.3 x earnings. If you think that volatility will be elevated for the long term due to geopolitical uncertainty and potentially a slowing US economy, consumer product companies and traditional stalwarts like Coca Cola could outperform tech for the long term. As you can see below, Coca Cola has outperformed Nvidia so far this year.

Chart 1: Coca Cola and Nvidia, normalized to see how these two stocks move together YTD.

Source: XTB and Bloomberg

Overall, valuations are weighing on tech this year, as the stock market rally broadens out in the US and elsewhere. This is bad news for tech and is a harder challenge for it to overcome, in our view. While Nvidia has an elevated P/E ratio compared to other sectors in the market, its valuation is reasonable compared to other US tech giants. Eventually, the tech sector’s valuation could decline to levels that may entice buyers, but that could take some time. For now, we do not expect tech to move as a unit, and we expect investors to treat each company on its own merits.