Valuation premium at a six-year low, tech giants " squeezing out moisture"

April 2, 2026

Word count: 1,849, estimated reading time: about 3 minutes

Author | First Financial Fan Zhijing

This week, U.S. tech growth stocks experienced a long-awaited rebound, as the previous premium of this sector over the S&P 500 has almost been fully erased. Data from the Dow Jones Market shows that, based on expected earnings over the next 12 months, the valuation gap between the S&P 500 index and the information technology sector of the S&P 500 has narrowed to its lowest level since June 2020. Against the backdrop of Trump considering withdrawing from Iran, could this be a turning point for tech giants to stabilize and rebound?

Tech Giants’ Market Value Evaporates Over $1 Trillion

Before the outbreak of U.S.-Iran conflict, concerns about the sustainability of AI spending by large cloud service providers had intensified, causing tech stock prices to remain under pressure in recent months. Google, Amazon, metaverse platform companies, and Microsoft have collectively increased their capital expenditure plans by 60% this year, with a total expected scale reaching $650 billion.

The Middle East conflict further dampened risk appetite. First Financial’s summary shows that in just March, the combined market value of the seven major tech giants evaporated nearly $1.3 trillion.

Since the beginning of this year, Microsoft’s stock price has fallen more than 20%, recording its worst quarterly performance since 2008. Market concerns include its competitiveness in AI and worries that the software sector as a whole will be impacted by AI-related shocks.

As the largest weighting stock in the S&P 500, Nvidia’s current forward P/E ratio is well below its five-year average of 37.12 times.

Cowen Group analyst Joshua Buchalter recently stated in a report that Nvidia’s market cap exceeding $4 trillion has caused its stock price trend to diverge from other stocks. “Adding another $2 trillion in market value is much more difficult than the previous $2 trillion increase.” Additionally, investors are seeking other AI-related targets with greater growth potential, such as storage chips and semiconductor equipment. “We have repeatedly received feedback from investors that companies in Nvidia’s supply chain have more upside potential and flexibility than Nvidia itself,” he said.

CFRA Research Chief Investment Strategist Sam Stovall said that investors are highly focused on rising oil prices and bond yields, while also paying attention to any news indicating the U.S. and Iran are closer to reaching a resolution. “Everyone knows that the longer oil prices stay high, the greater the risk of the U.S. economy slowing down or entering recession.”

Has the Darkest Hour Passed?

In the face of still-chaotic Middle East tensions, some market participants have begun to adopt an optimistic outlook.

Legendary hedge fund manager Bill Ackman posted on social media that investors should “ignore the pessimists.” “A batch of the world’s best companies are currently undervalued. Don’t listen to mainstream media. Now is one of the best times in a long while to buy quality assets.”

Morgan Stanley’s Chief U.S. Equity Strategist Mike Wilson said that the S&P 500 has fully reflected the high oil prices. This star analyst believes that the current correction in U.S. stocks is nearing its end.

In his weekly outlook report, Wilson wrote that since the high point in 2025, the forward P/E ratio of the S&P 500 has compressed by 17%. This level is comparable to the adjustments seen historically when there was no recession or Fed rate hike cycle. Moreover, the market has at least priced in the recent surge in oil prices. Morgan Stanley forecasts that Brent crude oil prices, after rising to $110 per barrel, will fall back to $80 per barrel.

Based on past oil shock cases, Wilson summarized several key differences in this cycle: market earnings growth is accelerating (not slowing or turning negative); the magnitude of this oil price fluctuation is smaller than in previous cycles; and the likelihood of the Strait of Hormuz oil tanker traffic resuming is higher than the probability of the U.S. falling into recession.

However, Wilson emphasized that a significant risk is further tightening of monetary policy. He found a strong negative correlation between interest rates and the stock market, with market sensitivity to interest rates at multi-year highs. The U.S. 10-year Treasury yield once approached 4.5%, a level at which the White House reversed its stance and made concessions on tariffs last year.

Michael Darda, Chief Economist and Market Strategist at Rosedale Capital, recently stated in a report: “Now is the time to increase allocations to the information technology sector.” He provided three reasons: first, since the S&P 500 Information Technology sector peaked last fall, earnings expectations have been raised by 28%; second, despite this, the sector is still down 17.2% from its historical high; third, this rise and fall have caused the sector’s forward P/E ratio to plummet to just above 20 times, roughly matching the level at the end of the market’s tariff panic in 2025.

Additionally, Darda found that the current forward valuation of the information technology sector is only 77% of its three-year average, a position close to the sector’s bottom during the 2022 bear market—though at that time, earnings expectations were much lower than now. “Last summer, when we recommended reducing or hedging the IT sector, its valuation was 17% above the three-year forward average. Overall, we remain optimistic about traditional economic sectors and growth stocks and momentum stocks that have been dragged down by recent energy and interest rate market volatility.”

Of course, if corporate earnings decline sharply, valuation support will weaken. Despite rising energy costs potentially squeezing profit margins, most analysts remain optimistic about corporate profits. Goldman Sachs’ Chief U.S. Equity Strategist Ben Snyder’s team states that market consensus expects S&P 500 earnings per share growth of 12% this quarter, marking the sixth consecutive quarter of double-digit EPS growth for the index. “Among all sectors of the S&P 500, analysts expect the information technology sector’s EPS to grow 44%, contributing 87% of the index’s total earnings growth in Q1 2026. Therefore, during this earnings season, the trend of AI capital expenditure and signs of related investments beginning to show returns will continue to be market focal points.”